In a fairly ironic and cryptic post yesterday I alluded to the potential influence of the Russian central bank on the value of the euro. This situation is not to be taken lightly. The euro today hit another record passing the 1.32 to the dollar mark. At the same time business confidence index readings from Germany and Italy indicate that those who need to export are none too happy about the future.
A Russian move to raise euro reserve holdings from 30% to 40% of the total, mentioned as a possibility in an FT article yesterday, could have profound consequences:
Neil Mellor, currency strategist at Bank of New York, raised the prospect of a potential domino effect: ?Talk of central banks readjusting their reserves to encompass a greater euro weighting has been rife in the foreign exchange markets for quite some time, along with speculation that OPEC members may shift to euro-denominated oil sales.
?A dam can only take so much pressure. Russia?s stated intent to review its reserve weightings, in favour of the euro once again, could well lead to similar announcements by its counterparts across the world.?
Source: Financial Times
So the danger is that if Russia initiates others may follow. A fall in the dollar’s value of say 30% over 3 years would be one thing, but a rapid fall of this kind of magnitude precipitated by a shift in central bank holdings over a limited time horizon would be quite another. This is definitely one to watch.