BRICs Add $60 Billion Reserves as Zhou Derides Dollar

By Shanthy Nambiar and Lilian Karunungan

June 8 (Bloomberg) -- The BRICs are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the U.S. currency.

Brazil, Russia, India and China increased foreign reserves by more than $60 billion in May to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July.

While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is proposing the BRICs consider creating a new unit of exchange when they meet in Yekaterinburg on June 16. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries.

“Foreign central banks do not want to see their currencies relentlessly strengthen,” said Daniel Tenengauzer, head of foreign-exchange and emerging-market debt strategy at Banc of America-Merrill Lynch in New York. “Such a move would dampen an already-weak outlook outside the U.S. and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline.”

The U.S. currency rallied in Asia today, gaining 0.4 percent against the Indian rupee to 47.29. The yuan 12-month offshore forward contract, an agreement to buy the currency in future, fell 0.2 percent to 6.8356 per dollar.

Real’s Rally

International reserve assets excluding gold held by the BRICs, an acronym coined by Goldman Sachs Group Inc. Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, total $2.8 trillion, a 7.8 percent increase from a year ago and 42 percent of the world’s total, data compiled by Bloomberg show.

The real, ruble, and rupee strengthened and the Dollar Index posted its biggest decline in 24 years last month as signs the global recession may be easing spurred investors to seek higher-yielding alternatives to the U.S. currency. A net $26.1 billion has flowed into emerging-market equity funds this year, EPFR Global, which tracks $11 trillion worldwide, said June 4.

The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.

Currency Alternatives

The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, lost 6.4 percent last month, the biggest decline since March 1985.

Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar. The subject may be on the agenda when he meets his counterparts in the Ural Mountains city of Yekaterinburg, the Kremlin said this month.

China’s central bank Governor Zhou Xiaochuan suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March. His Indian counterpart Duvvuri Subbarao hasn’t commented on that plan. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take such a “revolutionary” step over time.

Last month, China, the biggest importer of soybeans and iron-ore, and Brazil, whose main exports include soy, metals and petroleum, began studying a proposal to move away from the dollar and use yuan and reais instead.

Dollar ‘Discontent’

“What we are seeing is a public expression of discontent over the dollar, yet nobody knows what needs to be done specifically,” said Elina Ribakova, the chief economist in Moscow for Citigroup Inc.

Brazil, the only country to break down its dollar purchases, acquired $2.8 billion of the greenback in May, Russia bought at least $17 billion of foreign currencies, while India’s reserves rose by $10.6 billion, central bank data show. China may have purchased $30 billion in foreign exchange last month, Hong Kong- based research company SJS Markets Ltd. estimates.

At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the IMF in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.

Rising Holdings

Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside America, up from 35 percent in 2000. China is the biggest foreign owner of Treasuries, increasing its holdings to $768 billion as of March from $60 billion in 2000.

A steeper dollar decline would hurt BRIC exports, devalue their reserves and worsen the global credit crisis, said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment banking arm of Credit Agricole SA.

“It would be shooting yourself in the foot to sell U.S. assets and move away from dollars too quickly,” said Kotecha. “As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful.”

Intervention, where central banks buy or sell currencies to influence exchange rates, may help bolster the dollar, he said.

Currency Forecasts

The median estimate of analysts surveyed by Bloomberg is for the real to fall 8.6 percent to 2.13 per dollar by year-end, while the rupee will drop 1.4 percent to 48. The yen is forecast to weaken 4.7 percent and the euro by 2 percent.

“The dollar will stabilize against its major trading partners around the turn of the quarter,” said Michael Shaoul, chief executive officer at New York-based institutional brokerage Oscar Gruss & Son Inc., who called the emerging-market rally in February. “It got stronger than was warranted during the crisis and weakened rapidly during the recovery.”

Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all by the safest, most easily traded assets, such as Treasuries. The MSCI EM Index tumbled 54.5 percent last year.

A shortage of the U.S. currency forced central banks to pump reserves into their economies. The Dollar Index rose 18 percent between June 30 and March 31.

Reserves Reversal

Asian central banks, excluding China, ran down foreign- exchange reserves by more than $300 billion in the 12 months ended April 30, according to London-based HSBC Holdings Plc. Russia’s slid by $213 billion in the eight months ended March 31, central bank data show. Brazil’s reserves dropped $5.7 billion in the six months ended Feb. 27.

Emerging-market central banks are buying dollars as stronger currencies threaten exports while the global economy contracts.

The IMF estimates the world’s gross domestic product will shrink 1.3 percent this year. Trade worldwide will plunge 9 percent, the most since World War II, the World Trade Organization said in March.

Brazil’s $1.3 trillion economy, Latin America’s largest, may drop 0.73 percent in 2009, the biggest contraction in 19 years, according to the median forecast in a May 29 central bank survey. Russia’s economy will contract at least 6 percent, Medvedev said this month. China’s exports, which account for 60 percent of its GDP, slumped 22.6 percent in April from a year earlier, according to the government.

Dollar Strength

“There might be a risk-appetite reversal which could mean some temporary dollar strength,” said Peter Eerdmans, head of emerging-market bonds in London at Investec Asset Management Ltd., which manages $700 million in developing-nation debt. “We have taken profits on some of our emerging-market positions.”

Brazil’s central bank President Henrique Meirelles said last month foreign currency flows are creating a “very favorable” condition for policy makers to boost reserves.

“Given the breadth and depth of the U.S. economy in relation to the world economy, it is unlikely the dollar will be displaced as the principal reserve currency anytime soon,” said Nikhil Srinivasan, who overseas $20 billion of assets as chief investment officer for Asia and the Middle East at Munich-based Allianz SE, Europe’s biggest insurer.

To contact the reporters on this story: Shanthy Nambiar in Bangkok at snambiar1@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net