Dollar falls as Sweden slashes holdings in half

By Steve Johnson
Published: April 21 2006 12:28 | Last updated: April 21 2006 12:28

The US dollar fell against the euro in European morning trade on Friday as Sweden’s central bank said it had slashed its dollar holdings almost in half.

The Riksbank revealed that it had cut the proportion of dollars in its reserves from 37 to 20 per cent, as well as selling off all its holdings of yen, which previously amounted to 8 per cent of its reserves.

The central bank balanced these disposals by increasing its holdings of euros from 37 to 50 per cent, as well as building a new Norwegian krone position of 10 per cent.

Although Sweden’s reserves are small, at around $21bn, and the Riksbank said its re-weighting was complete, the news thrust the ongoing issue of potential central bank diversification out of the dollar back into the limelight.

“Today’s announcement will merely add to market fears that the end to the Federal Reserve tightening cycle will encourage more diversification away from the dollar, and into the most liquid alternative of the euro,” said Chris Turner, head of FX strategy research at ING Financial Markets, who reiterated its view that the euro will return to $1.35 by the end of the year.

The dollar slipped 0.2c to $1.2334 against the euro, Y0.15 to Y117.31 against the yen and 0.3c to $1.7811 versus sterling.

However currency moves were kept in check by a degree of uncertainty ahead of this weekend’s meeting of G7 finance ministers, where the issues of global imbalances and Chinese currency policy will be on the agenda.

The yen was broadly strong, ticking up Y0.3 to Y144.35 against the euro and Y0.2 to Y208.59 against sterling as the Japanese Life Insurers’ Association said the conditions for a Japanese rate rise by mid-year were improving, and that the sector would become active buyers of Japanese government bonds once yields reached 3 per cent.

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