Money managers under the microscope
Currency managers nurture the view that emerging market central banks need to diversify their holdings away from the US dollar but so far there seems to have been little movement in this direction. Ousmene Mandeng, head of public investment advisory at emerging markets specialist Ashmore, notes that historically central banks act unilaterally to reallocate their reserves, especially when they are concerned about a possible impairment due to devaluation.
The problem for central banks with very large US dollar reserves – such as China – is the lack of a viable alternative reserve currency. “For the inertia to be overcome we will need a common framework so that countries can get out of the dollar in an orderly fashion,” Mandeng says.
If the dollar weakens in a secular manner over the next decade, this will hit several percentage points of GDP in countries where it accounts for a large proportion of central bank FX reserves. “That’s a considerable impairment of public wealth – no-one wants a disorderly unwinding or greater forex market volatility,” says Mandeng.
In the absence of a common framework, however, a disorderly unwinding is what we are looking at. Michael Power, chief strategist at Investec Asset Management, believes that smaller central banks like Singapore will look for every opportunity to move before China. “There is plenty of evidence that the secondary and tertiary central banks are jumping the queue if they can.”