Wednesday, November 25, 2009

Russia, India Diversifying Away From USD & Euro

Russia's central bank announces that they will try to diversify its foreign currency holdings. Currently, most of it is in U.S. dollars (47%) and euros (41%) with the rest being in pounds (10%) and yen (2%). Apparently, they start including Canadian and Australian dollars. In principle that might be a good idea, although the timing may not be perfect (they would have gotten Canadian and particularly Australian dollars a lot cheaper last year). It is not clear at which currency's expense these new holdings will come, but it will probably mostly be at the expense of the two largest currencies, which is to say the U.S. dollar and the euro.

The Australian central bank will probably not object to this given their past statements, but the Canadian central bank will probably not be happy about this as they have already complained that they think the Canadian dollar is too strong. The question is what, if anything, the Bank of Canada will do to weaken the Canadian dollar.

Meanwhile, gold rose to yet another all time high (at least in U.S. dollar terms), partly as a result of rumors that the Indian central bank will buy even more gold. The price of gold has previously been suppressed by the IMF's planned gold sales, so the willingness of the Bank of India and others to absorb these gold sales with their own purchases is clearly bullish for gold. Bank of India seems to understand that diversifying among paper currencies is not enough, you need real values in the form of gold too as there is always a risk that central banks will inflate away the value of bonds. Being a central bank, that is something they should be and are aware of, though other central banks that don't buy or even sells gold seems to actually believe their own official image of being "inflation fighters".