02 April 2017

Financial Times: Central banks cut euro exposure and favour sterling long-term

Central banks are dumping euros amid concerns over political instability, weak growth and the European Central Bank’s negative interest rate policy — and favour sterling as a long-term, stable alternative.

[...] According to a survey published Monday of reserve managers at 80 central banks, who together are responsible for investments worth almost €6trn, the stability of the monetary union is their greatest fear for 2017.

The results — compiled by trade publication Central Banking Publications and the bank HSBC earlier this year — show some respondents have cut their entire exposure to the euro, while others have reduced their holdings of investments denominated in euros to the bare minimum.

More than two-thirds of the 80 central banks had changed their portfolio allocation, while roughly that same amount had changed the duration of their investments.

Developing and emerging-market central banks, some of which are among the world’s biggest reserves holders, were more likely than those from advanced economies to have shifted out of the euro.

The UK’s decision to quit the EU has not affected the popularity of sterling as an investment currency so far, with 71 per cent of respondents saying the attractiveness of the pound was undimmed in the longer term.

Due Diligence Sign up to your daily M&A email briefing Keep up to date on the latest news and insight on deals every weekday morning While central bankers said they would become more cautious about investing in the pound over the next few years, the survey showed many believe Brexit could provide an opportunity for them to diversify their portfolios further into the future.

Almost 80 per cent of respondents said the election of Donald Trump had not changed their overall view on the US dollar.

Just over a third of the respondents, around half of which were from emerging market central banks, said their concerns over the European single-currency area were based on growing political instability in Europe, which has seen anti-EU parties across the continent secure a larger share of the popular vote in recent years. [...]

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