Emerging-Market Currencies Fall 30% in Reserves, Citigroup Says

Global central banks sold 30 percent of their holdings in emerging-market currencies from foreign reserves in the second quarter as the Brazilian real to the Indian rupee tumbled, according to Citigroup Inc.

Reserve managers divested as much as $20 billion in their holdings in developing-nation currencies, strategist Steven Englander wrote yesterday in a research note to clients, citing data from the International Monetary Fund’s quarterly reserves report. The central banks may have sold a similar amount from the reserves in the third quarter, Englander wrote.

Emerging-market currencies have declined since May on concern a tapering of Federal Reserve stimulus will drain capital and stall economic growth in developing nations. The decline in allocation to emerging markets was a reversal of central banks’ practice of diversifying their reserves from dollars and euros.

“It’s fair to say that this kind of move suggests reserve managers are more cautious toward the medium-to-long-term outlook for emerging-market currencies,” Englander said in a telephone interview from New York today. The selloff “may have made reserve managers as well as private sector managers wonder whether some of the attractiveness in risky assets was due to liquidity rather than underlying fundamentals.”

The Brazilian real has fallen 6.9 percent to 2.2025 per U.S. dollar since May 22, when Fed Chairman Ben S. Bernanke signaled that U.S. monetary stimulus may be scaled back. The Indian rupee dropped 11 percent to 62.4650 per dollar.

‘Other Currencies’

Adjusted for valuation changes, holdings of central bank reserves that are in the “other currencies” category in the IMF report declined to less than $75 billion in the second quarter from more than $100 billion in the previous period, according to Englander’s calculations.

IMF defines “other currencies” as those other than the dollar, yen, euro, Swiss franc, British pound and the Australian and Canadian dollars. While currencies such as the Norwegian krone and Swedish krona may be included in the category, the reserves declines are probably dominated by emerging-market currencies, Englander wrote.

Until a year ago, central banks had accelerated the move away from major reserve currencies since the global financial crisis in 2008 as the dollar declined.

Before it's here, it's on the Bloomberg Terminal.