Euro, Yen Bolstered by Emerging Nation Currency Sales, BBH Says

By Patricia Lui

July 24 (Bloomberg) -- Central banks of emerging nations are boosting demand for U.S. Treasuries, the euro and the yen as they sell their own currencies to stem appreciation, according to Brown Brothers Harriman & Co.

Some $341 billion was added in the past four months to the foreign reserves of Brazil, Russia, India and China, the so- called BRIC nations, along with South Korea, Taiwan and Singapore, as central banks intervened in their currency markets to protect exporters, Brown Brothers said in a note today. The purchases increased demand for U.S. debt and currencies including the euro, sterling and yen benefited from attempts to diversify away from dollar assets, according to the report.

“Emerging market policy makers do not want a stronger currency at this stage of their business cycles”, wrote Win Thin, a currency strategist at Brown Brothers in New York. “We fully expect currency intervention to surge this month.”

Twenty-four of the 26 emerging currencies tracked by Bloomberg gained this week on investors’ increased appetite for risk as improved corporate earnings added to signs that the worst of global recession has passed.

Eight of Asia’s 10 most-active currencies outside of Japan strengthened against the dollar in the past four months, led by a 15 percent surge for Indonesia’s rupiah and an 11 percent advance for Korea’s won.

China, which has the world’s largest currency reserves, added $186 billion this year to take its holdings to $2.1 trillion. Korea’s reserves climbed $31 billion this year to $232 billion as of June 30. India’s reserves swelled $7 billion to $253 billion as of July 10.

Where the Dollars Went

“What happened to all those accumulated dollars?” Thin wrote. “For one thing, they went into U.S. Treasuries. Emerging central banks are one part of the answer to who’s going to buy increased U.S. Treasuries issuance.”

Foreign holdings of U.S. Treasuries jumped $216 billion to $3.3 trillion in the first five months of the year, according to data from the U.S. government. China’s holdings climbed $74 billion during that period.

All 10 major world currencies gained against the dollar in the past three months, according to data compiled by Bloomberg. The euro climbed 7 percent, the sterling strengthened 13 percent and the yen rose 2 percent.

“Diversification of incoming reserves is probably near the top of the concerns for these emerging market reserve managers who are left sitting on a pile of dollars that it wants to move into euros, sterling and yen,” Thin wrote. “This helps explain constant market chatter of emerging market central banks on the bid in the euro in the last several months.”

The euro traded at $1.4163 against the dollar as of 12:26 p.m. in Singapore. The currency has gained 9.2 percent in the past six months.

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net