Euro most affected by Yuan SDR inclusion

1 December,, Lagos – The Euro has recorded a tumble of about 13 percent against the dollar in 2015 so far, marking the largest fall in a decade. The group currency has dipped about 5.3 percent against the greenback in the third quarter alone. Also, central banks have reduced the proportion of the currency in their reserves to the lowest since 2002. The 19 nation currency is now expected to reduce in prominence as the Chinese Yuan joins the IMF’s Special Drawing Rights basket. The Euro’s dominance in the SDR basket will drop to 30.93 percent, from 37.4 percent, the organization said Monday.

The currency could also weaken further as the European Central Bank President Mario Draghi signaled on Oct. 22 that ECB policy makers are open to boosting stimulus, after embarking on a 1.1 trillion-euro ($1.2 trillion) asset-purchase program in March.

New SDR rebalancing

The Yuan is now set to exceed the yen and sterling in the new basket arrangement, while the dollar maintains almost the its current level. China’s currency will exceed yen and sterling in the new basket. The levels will be 41.73 percent for the dollar, 8.33 percent for the yen and 8.09 percent for the pound, the IMF said. At present, the dollar accounts for 41.9 percent of the basket, while the pound accounts for 11.3 percent and the yen 9.4 percent.

“The more likely impact is on euro holdings as the yuan, over time, is seen as the main alternative reserve currency to the dollar, replacing the euro in that role,” said Mansoor Mohi-uddin, senior markets strategist at Royal Bank of Scotland Group Plc. in Singapore. “Further, in 1999 when the euro was introduced, it still took reserve managers four years before they started diversifying into the single currency. So, we shouldn’t expect strong inflows into the yuan in the near term from risk-averse reserve managers.”

Euro hardest hit 

With the Euro getting the most impact from the Yuan SDR inclusion, it is unlikely that central banks will decrease euro reserves dramatically near-term but the changes to the SDR and, perhaps, the prevalence of negative rates at the short-end of the euro rate curve more especially, suggests the euro may be less favored among reserve-asset managers, Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia opines.

Think we missed something? Let us know down in the comments section.

Share Your Opinion, Write a Comment