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As China moves towards pegging the CNY to a basket of currencies or floating the Yuan, there could be a notable impact on the Euro. China is the second largest holder of US Treasury debt, approximately $191 billion second only to Japan and Euro Zone. A revaluation of the Yuan will force Chinese policy makers to sell a least part of their US dollar holdings and buy euros and/or yen. Currently there is a growing shift by different countries to diversify their foreign exchange reserves away from dollar and including an increasing amount of euro's in their mix of currencies. So far we know that Russia will be readjusting their dollar denominated reserve holdings. South Africa and India are also suspected of dumping US treasuries. According to the latest |
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Bank of International Settlements report, oil exporters have reduced their dollar holdings over the past 3 years. Central banks in the Middle East have exchanged some dollar reserves for euros to avoid incurring losses related to the slide in the dollar. Although the euro was only launched in 1999, it has since become the world's second most popular reserve currency. As time passes, we expect more central banks to hold an increasing number of euros as they adjust their reserve holdings to reflect their trade flows. For China, their mix will continue to include the dollar, but by a diminished capacity. However, they are also expected to increase their holdings of Japanese yen and the euro.
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