Low euro

[GGard97342@xxxxxx]

24 May 2001  Geoffrey Gardiner to PKT

The mystery of the overvalued dollar and  and pound.

A solution?

In one of his recent notes Henry Liu reminded his readers that the members of
Euroland agreed to provide the European Central Bank at its start with
reserves of euros40 billion. The March press release of the ECB gives the
reserves as euros46.723 billion. Of that sum euros31.623 billion is held in
securities which are not "eu" issues. So they will be dollars and yen
securities in the main. I forgot to ascertain whether the ECB defines
"non-eu" as "non-euro" or "non-European Union", but as the former would make
sense it is likely that the "non-eu" securities include Sterling issues.

Presumably when the ECB was created each of the central banks of the member
countries took the opportunity created by the need to provide reserves to the
ECB of transferring to it those reserves which were denominated in the
currencies of the other ten: holdings in the other ten were going to become
euros and were therefore useless as reserves of "foreign exchange."

I presume that the ECB converted all these holdings into non-euroland
currencies and thereby caused the euro to fall and the other currencies to
rise.

The euro-system as a whole has reserves of euros393.427 billion. Of this
euros209.967 billion is in securities of which only 23 million is in eu
issues. It looks as though the members of euroland have followed the dame
course of action.

Can anyone more knowledgeable than I confirm that I am right in deducing that
the weakness of the euro is entirely due to its creation, which caused the
need for holdings of its component currencies to be converted into non-eu
holdings, mostly dollars, no doubt?

If this is correct then one can see a brilliant way of competitively
devaluing one's currency - join a currency union!

Comments please.

Geoffrey Gardiner