Birth of Euro and Impact on Foriegn Trade

8/8/2019 Birth of Euro and Impact on Foriegn Trade

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Birth of EURO and Its Impacton World Trade

Study of Birth of EURO and also Analysis on Role of EURO

as Global currency has been done. Comparison of Euro vis-

-vis Global currencies like US$, JPY, UK Sterling on the

basis World Debt Market, Derivatives, Global Reserves etc..

Also a study has been made on how Euro can take over

US$ as Global Currency

Submitted to:

Prof. Vivek Bhatia

Professor, ICF

FORE School O Mana ement

Group -1 (FMG-18Y)

Aakriti Kakkar 91001

Aditi Bindlish 91003

Ankit Gupta 91006

Madhusudan 91029

Pragati Saraf 91040


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International Corporate Finance| Group 1| Euro and its Impact on World Trade 2

Table of ContentsList of Figures and tables ........................................................................................................................ 3

Evolution of the European Union (EU) .................................................................................................... 4

BIRTH OF THE EURO ................................................................................................................................ 7CURRENCY SIGN ...................................................................................................................................... 9

COINS AND BANK NOTES ........................................................................................................................ 9

INTRODUCTION OF CURRENCY ............................................................................................................. 10

DIRECT AND INDIRECT USAGE .............................................................................................................. 11

Use as reserve currency ........................................................................................................................ 12

THE EURO IN GLOBAL MARKETS ........................................................................................................... 12

The Euro in International Debt Markets ........................................................................................... 12

Narrow Versus Global Measure: The Currency Composition of International Debt Securities

Markets In 2009 ................................................................................................................................ 12

The Euro in International Derivatives Market .................................................................................. 15

The Euro in Global Foreign Exchange Reserves ................................................................................ 17

Euros Exchange Rate: The Trend ......................................................................................................... 20

Reserve Currency Determinants ........................................................................................................... 21

International Use of the Euro So Far..................................................................................................... 22

Factors that suit a currency for International Status: ........................................................................... 24

What role will the euro play as a reserve currency? ............................................................................ 27

The euro may benefit from the dollar weakness .................................................................................. 27

Central banks rising investment requirement ..................................................................................... 29

Focus on yield of foreign exchange reserve investments ..................................................................... 29

What will happen to the euros role as a reserve currency after 2010? .............................................. 30

Appendix 1 ............................................................................................................................................ 32

Appendix 2 ............................................................................................................................................ 33


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List of Figures and TablesFigure 1 Evolution of EU .......................................................................................................................... 4

Exhibit 1 Fixed Exchange Rates -Euro Countries .................................................................................... 8

Figure 2 Map of Euro area .................................................................................................................... 11

Figure 3 Proportion of Currencies in International (Narrow, Constant Rate) ...................................... 13Figure 4 Proportion of Currencies in International (Global, Constant Rate) ........................................ 13

Figure 5 Proportion of Currencies in International (Narrow, Current Rate) ......................................... 14

Figure 6 Proportion of Currencies in International (Global, Current Rate) .......................................... 14

Figure 7 Amounts outstanding of OTC Single-currency Interest Rate Derivatives ............................... 15

Figure 8 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Amount ............... 16

Figure 9 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Proportion .......... 16

Figure 10 Composition of Various Currencies in Global Reserves ........................................................ 18

Figure 11 Proportion of Euro in Global Reserves .................................................................................. 19

Figure 12 Comparison of Share on Euro, Yen, USD in Global Reserves ................................................ 19

Figure 13 Exchange Rate of Euro ........................................................................................................ 20

Figure 14 Exchange Rates- Global Currencies ....................................................................................... 21

Figure 15 Currency Distribution- Market Turnover .............................................................................. 23

Table 1 ................................................................................................................................................... 24
http://c/Users/Madzz/Desktop/ICF-RPs/Birth%20of%20Euro%20and%20Impact%20on%20Foriegn%20Trade.docx%23_Toc271122867http://c/Users/Madzz/Desktop/ICF-RPs/Birth%20of%20Euro%20and%20Impact%20on%20Foriegn%20Trade.docx%23_Toc271122867


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Evolution of the European Union (EU)

Figure 1 Evolution of EU

European Coal and Steel Community (ECSC)

The origin of the European Union goes back to the European Coal and Steel Community(ECSC),

which was formed with the then West Germany, France, Italy, Belgium, Netherlands and

Luxembourg in 1952.

After World War II, moves towards European integration were seen by many as an escape from

the extreme forms of nationalism which had devastated the continent. One such attempt to

unite Europeans was the European Coal and Steel Community which, while having the modest

aim of centralised control of the previously national coal and steel industries of its member

states, was declared to be "a first step in the federation of Europe".

Main aim:

Centralised control of the previously national coal and steel industries of its member

states

To eliminate import duties and quotas on coal, iron ore and scrap regarding the

international trade among member countries.

European Economic Community or European common market


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Successful functioning of ECSC stimulated the member countries to extend this facility to all

commodities by the Treaty of Rome in 1957.

Originally six countries viz, France, Federal Republic of Germany, Italy, Belgium, Netherlands

and Luxembourg formed into the EEC by Treaty of Rome, 1957.

The European Economic Community came into existence as a customs union or common

market in 1958 among the same six nations.

Later the number of member countries increased to nine on January 1, 1973 as United Kingdom,

Ireland and Denmark joined the community. Countries such as Greece, Spain, Australia, Finland

and Portugal joined later on.

In 1979, under the influence of Helmut Schmidt, then chancellor of Germany, and Valry

Giscard-dEstaing, then president of France, eight original member countries set up theEuropean Monetary System (EMS) as a zone of monetary stability with linked exchange rates.

The EMS became, in effect, a German mark zone, since its members pegged their exchange rates

to the mark and therefore found it necessary to base their monetary policy on that of the

Bundesbank.

Both inflation and interest rates tended to converge among EMS countries.

In 1986, the so-called Single European Act aimed to free the movement of goods, services,

capital, and people among EU countries by 1992, in order to form a Single Market, as it was

called.

European Union

Germanys dominance in the EMS in part motivated French offic ials to propose that a monetary

union be formed. Another reason for the proposal was that some Europeans feared that the

Single Market might be endangered if exchange rates were not locked together. Thus the Delors

Committee was established in 1988.

The report of the Delors Committee led in 1991 to the Maastricht Treaty (Treaty on European

Union), which may be regarded as the constitution of EMU.

The European Union was formally established when the Maastricht Treaty came into force on 1

November 1993, and in 1995 Austria, Sweden, and Finland joined the newly established EU.

With the introduction of uniform monetary policy, common currency and fiscal policy among

the member countries, the EEC became the European Union (EU).


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Formation of EMU

Germanys dominance in the EMS in part motivated French officials to propose that a monetary

union be formed. Another reason for the proposal was that some Europeans feared that the

Single Market might be endangered if exchange rates were not locked together.

EMU was conceived in 198889 by a committee consisting mainly of central bankers chaired by

Jacque Delors, then president of the European Commission. Thus the Delors Committee was

established in 1988.

The initiative, however, came from the political authorities, especially those in France and

Germany. Eleven of the fifteen European Union (EU) countries are EMU membersall but

Denmark, Greece, Sweden, and the United Kingdom.

The report of the Delors Committee led in 1991 to the Maastricht Treaty (Treaty on European

Union), which may be regarded as the constitution of EMU.

Criteria to qualify for EMU:

Countries should have an inflation rate within 1.5 % of the three EU countries with the

lowest rate.

Long term interest rates must be within 2% of the three lowest interest rates in EU.

Exchange rates must be kept within normal fluctuation margins of Europes exchange-

rate mechanism.

The amount of money owed by a government for 1997, known as the budget deficit has

to be below 3% of GDP.

The total amount of money owed by a government, known as the public debt has to be

less than 60 % of GDP.

As it turned out, only Greece failed to qualify. Denmark, Sweden, and the United Kingdom chose

not to join at the outset.

Countries of the EU made strenuous efforts to meet the budget deficit criterion, including some

creative accounting such as counting the proceeds of privatization and central bank profits

from the sale of gold as budget receipts. Actual budget constraints exacerbated the economic

slowdown in the EU in 199697. It would have made more sense to base the criterion on

structuralthat is, cyclically adjusted rather than actualbudget deficits.

It is understandable that some restraint on the budgetary policies of member countries would

be needed in the monetary union.


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Stability and Growth Pact

In 1996 a Stability and Growth Pactwas agreed upon. It provided a general rule that deficits

should not exceed 3 percent of GDPbut also allowed for political discretion.

In fact, if a countrys GDP were to fall by 2 percent or more in any year, it would not be penalized

for a deficit greater than 3 percent of its GDP.

It is somewhat ironic that this pact acknowledged the existence of the business cycle but the

convergence criteria did not. Flexibility of fiscal policy is necessary on the part of individual

member countries of EMU.

BIRTH OF THE EURO

The euro was born as the currency of the European Economic and Monetary Union (EMU).

Its introduction on January 1, 1999 marked the final phase of the EMU, a 3 stage process that

was launched in 1990 as EU member states prepared for the 1992 Single Market.

Stages

1990: Aimed at boosting cross border business activity, the first stage of the EMU lifted

restrictions on movements of capital across internal EU borders.

1994: The European monetary institute was established in Frankfurt to pave the way for the

European Central Bank.

1999: The Euro was introduced as the single currency for 11 EU member states: Austria,

Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and

Spain.

Why was the Euro introduced?

Since for most EU countries today, majority of International trade is with other EU members, a

common currency has:

Removed exchange rate risks from the internal market

Cut the costs of transactions

Encouraged firms to trade across national borders

The common currency has made the eurozone into an area of monetary stability in

Europe.


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It has also forced EU states to adopt responsible economic policies that contain inflation

and increase living standards.

ADMINISTRATION

The euro is managed and administered by the Frankfurt-based European Central Bank(ECB)

and the Eurosystem (composed of the central banks of the eurozone countries). As an

independent central bank, the ECB has sole authority to setmonetary policy. The Eurosystem

participates in the printing, minting and distribution of notes and coins in all Member States,

and the operation of the eurozone payment systems.

The 1992 Maastricht Treaty obliges most EU Member States to adopt the euro upon

meeting certain monetary and budgetary requirements, although not all states have done so.

The United Kingdom and Denmark negotiated exemptions, while Sweden turned down the euro

in a 2003 referendum, and has circumvented the obligation to adopt the euro by not meeting

the monetary and budgetary requirements. All nations that have joined the EU since 1993 have

pledged to adopt the euro in due course. In order to participate in the currency, Member States

are meant to meet strict criteria such as those given for EMU.

Exhibit 1 Fixed Exchange Rates -Euro Countries


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Due to differences in national conventions for rounding and significant digits, all conversion

between the national currencies had to be carried out using the process of triangulation via the

euro. The definitive values in euro of these subdivisions (which represent the exchange rates at

which the currency entered the euro) are shown below:

The rates were determined by the Council of the European Union, based on a recommendation

from the European Commission based on the market rates on 31 December 1998. They were set

so that one European Currency Unit(ECU) would equal one euro. The European Currency Unit

was an accounting unit used by the EU, based on the currencies of the Member States; it was not

a currency in its own right. They could not be set earlier, because the ECU depended on the

closing exchange rate of the non-euro currencies (principally the pound sterling) that day.

CURRENCY SIGN

A special euro currency sign () was designed after a public survey had narrowed the original

ten proposals down to two. The European Commission then chose the design created by the

Belgian Alain Billiet.

Inspiration for the symbol itself came from the Greek epsilon () a reference to the cradle of

European civilisation and the first letter of the word Europe, crossed by two parallel lines to

certify the stability of the euro.European Commission

COINS AND BANK NOTES

COINS

The euro is divided into 100 cents (sometimes referred to as euro-cents, especially when

distinguishing them from other currencies).

All circulating coins have a common side showing the denomination or value, and a map in thebackground. For the denominations except the 1-, 2- and 5-cent coins that map only showed the

15 Member States which were members when the euro was introduced. Beginning in 2007 or

2008 (depending on the country) the old map is being replaced by a map of Europe also

showing countries outside the Union like Norway. The 1-, 2- and 5-cent coins, however, keep

their old design, showing a geographical map of Europe with the 15 Member States of 2002

raised somewhat above the rest of the map.


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The coins also have a national side showing an image specifically chosen by the country that

issued the coin. Euro coins from any Member State may be freely used in any nation which has

adopted the euro.

The coins are issued in 2,1, 50c, 20c, 10c, 5c, 2c, and 1c denominations.

BANK NOTES

The design for the euro banknotes have common designs on both sides.

Notes are issued in 500,200,100,50,20,10,5. Each banknote has its own colour

and is dedicated to an artistic period of European architecture. The front of the note features

windows or gateways while the back has bridges. Some of the highest denominations such as

the 500 are not issued in all countries, though they remain legal tender throughout the

eurozone.

INTRODUCTION OF CURRENCY

The currency was introduced in non-physical form (traveller's cheques, electronic transfers,

banking, etc.) at midnight on 1 January 1999, when the national currencies of participating

countries (the eurozone) ceased to exist independently.

Their exchange rates were locked at fixed rates against each other, effectively making them

mere non-decimal subdivisions of the euro. The euro thus became the successor to

the European Currency Unit (ECU). The notes and coins for the old currencies, however,

continued to be used as legal tender until new euro notes and coins were introduced on 1

January 2002.

The changeover period during which the former currencies' notes and coins were exchanged for

those of the euro lasted about two months, until 28 February 2002. The official date on which

the national currencies ceased to be legal tender varied from Member State to Member State.

The earliest date was in Germany where the mark officially ceased to be legal tender on 31December 2001, though the exchange period lasted for two months more. Even after the old

currencies ceased to be legal tender, they continued to be accepted by national central banks for

periods ranging from several years to forever (the latter in Austria, Germany, Ireland and

Spain).

Launched in 1999, Europes single currency is now shared by 16 EU countries and around

329 million citizens, making it one of the worlds most important currencies and one of the

EUs greatest achievements.
http://en.wikipedia.org/wiki/1_euro_coinshttp://en.wikipedia.org/wiki/1_euro_coinshttp://en.wikipedia.org/wiki/1_euro_coinshttp://en.wikipedia.org/wiki/50_cent_euro_coinshttp://en.wikipedia.org/wiki/20_cent_euro_coinshttp://en.wikipedia.org/wiki/10_cent_euro_coinshttp://en.wikipedia.org/wiki/5_cent_euro_coinshttp://en.wikipedia.org/wiki/2_cent_euro_coinshttp://en.wikipedia.org/wiki/1_cent_euro_coinshttp://en.wikipedia.org/wiki/200_euro_notehttp://en.wikipedia.org/wiki/200_euro_notehttp://en.wikipedia.org/wiki/200_euro_notehttp://en.wikipedia.org/wiki/100_euro_notehttp://en.wikipedia.org/wiki/100_euro_notehttp://en.wikipedia.org/wiki/100_euro_notehttp://en.wikipedia.org/wiki/50_euro_notehttp://en.wikipedia.org/wiki/50_euro_notehttp://en.wikipedia.org/wiki/50_euro_notehttp://en.wikipedia.org/wiki/20_euro_notehttp://en.wikipedia.org/wiki/20_euro_notehttp://en.wikipedia.org/wiki/20_euro_notehttp://en.wikipedia.org/wiki/10_euro_notehttp://en.wikipedia.org/wiki/10_euro_notehttp://en.wikipedia.org/wiki/10_euro_notehttp://en.wikipedia.org/wiki/5_euro_notehttp://en.wikipedia.org/wiki/5_euro_notehttp://en.wikipedia.org/wiki/5_euro_notehttp://en.wikipedia.org/wiki/5_euro_notehttp://en.wikipedia.org/wiki/10_euro_notehttp://en.wikipedia.org/wiki/20_euro_notehttp://en.wikipedia.org/wiki/50_euro_notehttp://en.wikipedia.org/wiki/100_euro_notehttp://en.wikipedia.org/wiki/200_euro_notehttp://en.wikipedia.org/wiki/1_cent_euro_coinshttp://en.wikipedia.org/wiki/2_cent_euro_coinshttp://en.wikipedia.org/wiki/5_cent_euro_coinshttp://en.wikipedia.org/wiki/10_cent_euro_coinshttp://en.wikipedia.org/wiki/20_cent_euro_coinshttp://en.wikipedia.org/wiki/50_cent_euro_coinshttp://en.wikipedia.org/wiki/1_euro_coins


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DIRECT AND INDIRECT USAGE

Direct usage

The euro is the sole currency of 16 EU Member States: Austria, Belgium, Cyprus, Estonia,

Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal,

Slovakia, Slovenia and Spain. These countries comprise the "euro zone", some 326 million

people in total. Estonia will join in 2011.

With all but two of the remaining EU members obliged to join, together with future members of

the EU, the enlargement of the eurozone is set to continue further. Outside the EU, the euro is

also the sole currency of Montenegro and Kosovo and several European micro states

(Andorra, Monaco, San Marino and Vatican City) as well as in three overseas territories of EU

states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiriand Dhekelia). Together this direct usage of the euro outside the EU affects over 3 million

people.

Figure 2 Map of Euro area

(Source: http://www.ecb.int/euro/intro/html/map.en.html)


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It is also gaining increasing international usage as a trading currency, in Cuba, North

Korea and Syria. There are also various currencies pegged to the euro (see below). In

2009 Zimbabwe abandoned its local currency and used major currencies instead, including the

euro and the United States dollar.

Use as reserve currency

Since its introduction, the euro has been the second most widely held international reserve

currency after the U.S. dollar. The share of the euro as a reserve currency has increased from

17.9% in 1999 to 26.5% in 2008, at the expense of the U.S. dollar (its share fell from 70.9% to

64.0% in the same timeframe) and the Yen (it fell from 6.4% to 3.3%).

The euro inherited and built on the status of the second most important reserve currency from

the German mark. The euro remains underweight as a reserve currency in advanced economies

while overweight in emerging and developing economies: according to the IMFthe total of euros

held as a reserve in the world at the end of 2008 was equal to USD 1.1 trillion, with a share of

22% of all currency reserves in advanced economies, but a total of 31% of all currency reserves

in emerging and developing economies.

The possibility of the euro becoming the first international reserve currency is now widely

debated among economists. Former Federal Reserve Chairman Alan Greenspan gave his opinion

in September 2007 that it is "absolutely conceivable that the euro will replace the dollar as

reserve currency, or will be traded as an equally important reserve currency."

THE EURO IN GLOBAL MARKETS

The Euro in International Debt Markets

The issuance of international debt securities picked up during 2009 after a trough in 2008. The

euros share in the stock of international debt securities declined by more than 1 percentage

point in 2009, when measured at constant exchange rates, reaching 31.4% at the end of theyear. This reflected the relatively subdued net issuance of international debt instruments

denominated in euro during 2009, which declined compared with the previous year, whereas

the issuance of US dollar-denominated international debt instruments was relatively strong.

The financial sector remained the major issuer of euro-denominated bonds and notes

Narrow Versus Global Measure: The Currency Composition of International Debt Securities

Markets In 2009

The narrow measure of international debt issuance captures only international transactions,

although it does not cover the entire spectrum of international debt transactions. For instance, a


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non-euro area investor buying a euro denominated security issued by a euro area resident

would not be included in this measure. However, this narrow measure remains an unambiguous

indicator of the international use of a currency. The global measure includes all debt securities,

including domestic currency issues targeting the domestic market, and thus does not

distinguish between domestic and international bonds. Therefore, its currency composition is

distorted by the size of the home market and the purely domestic transactions.

Under Constant rate:

Figure 3 Proportion of Currencies in International (Narrow, Constant Rate)

Figure 4 Proportion of Currencies in International (Global, Constant Rate)

0

10

20

30

40

50

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008 2 3 4

2009 2 3 4

%o

ftotalDebt

Proportion in International Debt-Narrow Measure

EUR

USD

JPY

Other

Source: BIS, JEDH, ECB

0

10

20

30

40

50

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008 2 3 4

2009 2 3 4

Proportion in International Debt-Global Measure

EUR

USDJPY

Other



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Under Current rate:

Figure 5 Proportion of Currencies in International (Narrow, Current Rate)

Figure 6 Proportion of Currencies in International (Global, Current Rate)

Over the past decade, the share of the euro remained relatively stable in terms of the global

measure of debt issuance, slowly increasing from around 27% of global issuance in 1999 to

about 30% in 2009, measured at constant exchange rates. The share of the euro based on the

narrow measure of international debt, by contrast, displays a hump-shaped curve, peaking in

2005 and then gradually decreasing. Also it can be analysed that the issue of Debt, in the total

global debt market (on narrow basis) has raised till the year 2006, but later the proportion got

reduced. But in case of Global measure, the trend does not seem to be true. i.e.. if global measure

which includes both domestic as well as transnational issues has been under raise. If this trend

is compared with that of USD and JPY (Japan yen), the proportion of Euro has always been less

0

10

20

30

40

50

60

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Q2

Q3

Q4

2009 2 3 4

%o

ftotalDebt

Proportion in International Debt- NarrowMeasure

EUR

USD

JPY

Other


0

10

20

30

40

50

60

Proportion in International Debt-Global Measure

EUR

USD

JPY

Other



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than that of USD but more than JPY. But the trend in the years 1999-2005, under both the

measures, the proportion of USD was under fall but the share of euro was under raise. This is

mainly because governments of the member countries of EURO issued bonds initially.

The Euro in International Derivatives MarketIt is per se very much necessary to even study the presence of the currency in derivatives

market. While the substantial turbulence experienced in foreign exchange and derivatives

markets at the end of 2008 and in early 2009 resulted in considerable contractions in

transaction volumes and outstanding amounts, it did not manifest itself in tangible changes in

the way currencies are used in these markets. Indeed, any shifts in the role of the euro as a

direct consequence of the crisis could not be detected during the review period.

Figure 7 Amounts outstanding of OTC Single-currency Interest Rate Derivatives

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Amounts outstanding of OTC single-currency interest rate derivatives

Other

Pound sterling

Japanese yen

US dollar

Euro

Source: BIS Quarterly Review: 'June 2010


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Figure 8 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Amount

Figure 9 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Proportion

The data has been taken from BIS1. Among derivatives traded on organised exchanges, equity

and interest rate instruments experienced the largest drops, with notional principal outstanding

falling by 41.6% and 34.1% respectively by the first quarter of 2009 in comparison with the first

quarter of 2007.

1The Bank for International Settlements (BIS) is an intergovernmental organization of central banks which

"fosters international monetary and financial cooperation and serves as a bank for central banks.

0

20000

40000

60000

80000

100000

120000

140000

160000180000

200000

US$Billion

Amounts outstanding of OTC single-currency

interest rate derivatives

Euro

US dollar

Japanese yen

Pound sterling

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%45.00%

Amounts outstanding of OTC single-currency

interest rate derivatives

Euro

US dollar

Japanese yen

Pound sterling


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For interest rate contracts, the share of the US dollar and the euro increased to 34.1% and

39.1% respectively against a 2.3 percentage point fall of the Japanese yen. Additionally, the

persistently rising trend in the role of peripheral currencies from emerging and developing

countries seemed to have been at least temporarily interrupted by the financial and economic

turbulence, with the shares of these currencies recording some retrenchment during the review

period.

The Euro in Global Foreign Exchange Reserves

During the period under review, rapid global reserve growth resumed. As a result, global

foreign exchange reserves reached a new historical high (USD 8.2 trillion) at end-2009. Such

reserve buffers may have been useful in many vulnerable emerging market countries during the

crisis, but the excessive accumulation of foreign reserves is costly 2

While enhanced exchange rate flexibility would help to reduce the social costs of holding

reserves, reserve diversification has also been mentioned as a possible remedy. There appears

to be no mechanical link between reserve accumulation and reserve diversification. In fact,

recent research suggests that, depending on the motives for holding foreign exchange reserves,

a rise in the level of foreign exchange reserves may not be associated with increased

diversification of reserve portfolios3

The notion that reserve accumulation may not necessarily lead to swift diversification of foreign

exchange reserve portfolios is also supported by aggregate data which is available at the global

level. According to the IMFs Currency Composition of Official Foreign Exchange Reserves

(COFER)4 database, which covers the currency composition of around 60% of global foreign

exchange reserves, the share of major reserve currencies remained relatively stable throughout

2009.

However, this observation should be interpreted with caution since according to the IMF, Asian

countries in particular do not disclose the currency composition of their foreign exchange

reserves.

From the charts below it can be analysed that share of the euro increased by around 1

percentage point to 27.3% at end-2009 (from 26.4% at end-2008). However, this increase

2 Rodrik, D. (2006), The social cost of foreign exchange reserves, International Economic Journal 20 (3),

September, pp. 253-266.3

THE INTERNATIONAL ROLE OF THE EURO, ECB publications; page 334 COFER is an IMF database that keeps end-of-period quarterly data on the currency composition of official

foreign exchange reserves


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reflects to some extent the depreciation of the US dollar against the euro during the same

period. When measured at constant end-2009 exchange rates, the share of the euro increased by

0.3 percentage point, whereas the share of the US dollar decreased by around 1 percentage

point.

Figure 10 Composition of Various Currencies in Global Reserves

55% 56% 55% 50% 48% 47% 44% 41% 39% 37% 35%

14% 14% 15%18% 18% 18%

16% 16% 16%15% 15%

23% 22% 23% 25% 27% 29% 34% 37% 39% 43% 44%

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Global Reserves

US$ Unallocated reserves

Source: IMF Statistics Department COFER database and International Financial Statistics


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Figure 11 Proportion of Euro in Global Reserves5

Figure 12 Comparison of Share on Euro, Yen, USD in Global Reserves

Also if the proportion of each major currency in Global reserve is analysed, the share of US$ has

been drastically reducing over the years where as the share of Euro has been increasing or in

fact fluctuating. But one point to be noted is, the share of currencies of emerging economies like

China, India, Australia, have been on raise, this implies the major proportion of the reserve is

unallocated and unreserved.

5Source: IMF Statistics Department COFER database and International Financial Statistics

10.00%

11.00%

12.00%

13.00%

14.00%

15.00%

16.00%17.00%

18.00%

19.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

: Proportion in Global Reserves

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$ , Vs

US$ Swiss Francs


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Euros Exchange Rate: The Trend

After analysing the presence of EURO in Derivatives, Foreign reserves and also Debt market, it is

also necessary to analyse the exchange rate movement of EURO and also of the other currencies.

From the chart below on Exchange rate of USD/Euro we can observe that the exchange rate isfalling over the years. This implies that the euro is appreciating over the years when compared

with USD. Also if the trend is compared for that of Japan Yen (JPY) and UK Sterling, we can

observe that all the three currencies are on the rise.

Figure 13 Exchange Rate of Euro67

6

In terms of USD($).7 Source:www.Oanda.com

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Jan,

99

Jul,

99

Jan,

00

Jul,

00

Jan,

01

Jul,

01

Jan,

02

Jul,

02

Jan,

03

Jul,

03

Jan,

04

Jul,

04

Jan,

05

Jul,

05

Jan,

06

Jul,

06

Jan,

07

Jul,

07

Jan,

08

Jul,

08

Jan,

09

Jul,

09

Jan,

10

Jul,

10

$/
http://www.oanda.com/http://www.oanda.com/http://www.oanda.com/http://www.oanda.com/


21/33


Figure 14 Exchange Rates- Global Currencies

Also there have been many explanations for the Euro depreciation 1999-2002. A depreciation of

Euro can be expected due to a higher growth rate of money in the EU; a higher growth of per

capita income; a higher growth rate of population; a higher rate of capital accumulation; a faster

rising index of stocks or higher interest rates in the US. He points out specially a mistaken fiscal

policy leading to a growth weakness in Germany and the EU as the reason for the weakness of

Euro.8

On February 28, 2002 national banknotes and coins were finally withdrawn from use. Euro is

now not only a denomination currency but also a store of value and a transactions currency

(medium of exchange). Just from this time the Euro begins to appreciate for three consecutive

years and stabilises at the end of this period at a high level vis--vis Dollar.

Reserve Currency Determinants

The literature on what determines reserve currency status is fairly well- established, if often

lacking in quantification. Three key points are as follows:

Determinants: There is a list of determining factors, which appears in The most

important is the size of the country or region in which the currency is indigenously used,

but there are others as well.

Network externalities or economies of scale and scope are important: Each country is

more likely to use whatever currency is used by others. Thus international currency use

8Dollar-Euro Exchange Rate 1999-2004 - Dollar and Euro as International Currencies, Rasul Shams, Hamburg

Institute of International Economics Discussion Paper, May 2005, pp: 3-5.

0

20

40

60

80

100

120

140

160

0

0.2

0.4

0.6

0.81

1.2

1.4

Jan99

Jul99

Jan00

Jul00

Jan01

Jul01

Jan02

Jul02

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

$/

/$;/$

Exchange Rates

Source: Oanda.com


22/33


is not linear in the determinants. Rather, there may be a tipping phenomenon: if one

currency were to draw even and surpass another, the derivative of reserve currency use

with respect to its determining variables would be higher in that range than in the

vicinity of zero or in the range when the leading currency is unchallenged. In that sense

the switch happens rapidly.

In the chronological sense, however, the switch happens slowly. Whatever currency has

been used in the past will continue to be used in the future. Thus inertia is great.

International Use of the Euro So Far

Of the various indicators of international currency use, the sort that is available on the timeliest

basis is the currency of denomination in cross-border financial transactions. The euro soon

after its debut came into wide use to denominate bonds. Within Europe there was a tremendous

increase in issues of corporate bonds, denominated in euros, together with a rapid integration

of money markets, government bond markets, equity markets and banking. While the frenetic

activity seemed to be related to the debut of the euro, it does not meet the definition of

international currency use, because it is taking place inside the currencys home region

(Gaspar and Hartmann 2005; Rey 2005).

Outside Europe, the euro has been a success as well. Detken and Hartmann (2000) studied thedata from the euros first year in operation, doing a careful job of netting out intra -euro-area

holdings in order to be able to trace back a measure of euro-precursor currencies for five years

before 1999 that is comparable with post-1999 numbers. They found more of an increase in the

supply of euro-denominated assets outside of Europe than an increase in demand. The stock of

international debt denominated in Euros increased from about 20% on the eve of EMU to 30%

in 2003 (Rey 2005, p. 114).

When the euro arrived, although its share approximately equalled the sum of the shares of the

mark, French franc and guilder the year before EMU, it was less than what one would get by

adding in the share of ECUs (European Currency Units). This is to be expected: before 1999, the

12 central banks had to hold foreign exchange reserves, including each others currencies; these

disappeared at the stroke of a pen on 1 January 1999. One cannot simply compare pre- and

post-1999 figures to learn whether the advent of the euro has hurt the attractiveness of the

dollar as international reserve currency. The euros share in central banks foreign exchange

reserves reached 19.7% in 2003 and has grown steadily thereafter.9


23/33


International use of the euro has grown by other criteria as well. About half of euro land trade

with non-euro area residents is invoiced in the new currency (Hartmann 1998). The euros

share in international debt securities rose to above 30% (versus below 20% for the pre-1999

legacy currencies).10 Anecdotal evidence suggests that euro cash is increasingly accepted in

retail transactions around the world, and dollar bills decreasingly so.

The comprehensive triennial survey of foreign exchange trading volume put together by the

Bank for International Settlements (BIS) showed the dollar still easily in first place in 2001, at

85% of all spot trades (out of 200%), followed by the euro at 43% and the yen at 26% The same

ranking holds when one adds in forwards and swaps, and derivatives that are traded over the

counter. The next triennial BIS survey, covering April 2004, showed a small gain for the euro.

Including also forwards and swaps, the dollar was involved in 89% of all transactions, and theeuro in 37% in 2004 (BIS 2005).

Figure 15 Currency Distribution- Market Turnover

The most recent survey, covering April 2007, shows the dollar having declined further, to 86%

of all traditional transactions. (Meanwhile, in an unheralded comeback, the pound has been

closing in on the yen for the number 3 spot.) Over-the-counter FX derivative markets tell a

stronger story: the euro has been gaining share since its creation and the dollar losing share

(BIS 2007, p. 11). Figure 1 illustrates the dollars gradual loss of share in total foreign exchange

trading, traditional plus over-the-counter derivatives.

In short, the euro is the number 2 international currency, ahead of the yen, and has rapidly

gained acceptance, but is still well behind the dollar, which appears to most observers to be

comfortably in the number 1 slot. We now turn to a consideration of the determinants of

international currency status.

100USD

80

60

40EUR

20

02001 2004 2007 2001 2004 2007


24/33


Factors that suit a currency for International Status:

The literature on international currencies has identified a number of determining variables.

Output and trade. The currency of a country that has a large share in international

output, trade and finance has a big natural advantage. The US economy is still the

worlds largest in terms of output and trade. By such measures, Japan should be number

2, ahead of Germany. Alarmist fears of the early 1990s notwithstanding, it was never

very likely that Japan, a country with half the population and far less land area or natural

resources, would surpass the United States in sheer economic size. But the euro is now

the home currency to 15 countries. Their combined economic weight is much greater

than Germany alone, or Japan. As of 2007, It was not quite as large as the United States,

as Table 1 shows. But evaluated at current exchange rates, the value of US GDP

apparently fell below that of euro land GDP for the first time in early 2008. Very likely,

most of the 12 countries that have acceded to the EU over the last four years will

eventually join EMU, which will boost euro lands collective GDP a bit further. If the

other three long-time EU members, the United Kingdom, Sweden and Denmark, were to

join, euro land would definitively surpass the United States in economic size; but that is

much less likely to happen. If any of the larger countries do join, it will be at least some

years into the future. Thus the question of relative size also depends on the growth rates

of the US and European economies.

Table 1

2004 2007

US $11.5 trillion $13.8 trillion

Number ofmembers

Number ofmembers

Euro zone 12 $9.0 trillion 13

a

$11.9

trillion

EU (post-May 2004) 25 $12.1 trillion 27b

$16.6trillion

Notes: Includes Slovenia, but not Cyprus and Malta, who joined the euro in 2008.

Includes Bulgaria and Romania.

As an alternative to gross domestic product (GDP), we have also looked at countries

trading volume as another indication of their relative weights in the world economy.

The countrys financial markets. To attain international currency status, capital andmoney markets in the home country must be not only open and free of controls, but also


25/33


deep and well-developed. The large financial marketplaces of New York and London

have long benefited the dollar and pound relative to the euro and its predecessor the

Deutschmark, as Frankfurt still lags far behind as a financial centre. In our earlier paper,

we took it for granted that Frankfurt was the current home of the euro. Under the

scenario where the United Kingdom decided to join EMU, the euro benefited from the

double boost on counting the UK economy into the size of the euro land economy, and

bringing the advantages of Londons deep financial markets.

It is surprisingly difficult to come up with a proxy for size, depth or development that is

available for all the financial centers. We have opted to use as our primary measure data

on foreign exchange turnover in the respective financial centers: New York, London,

Frankfurt, Tokyo, Zurich, etc. This measure differs from turnover of the currencies(dollar, pound, euro, etc.), a variable that would be much more likely to be determined

simultaneously with the international currency status that we are trying to explain. It

captures, for example, the pre-eminence of London, which continues despite the small

role of the pound. This measure has the virtue of reflecting to some extent all kinds of

international financial transactions (both long-term and short-term, banking and

securities, bonds and equities). Moreover, it is possible to patch together a data set

covering the desired countries and years though but just barely, and with increasing

difficulty as one goes back through the 1970s. We also tried an alternative proxy for the

size of financial centers the size of the countries stock markets.

Confidence in the value of the currency. Even if a key currency were used only as a unit

of account, a necessary qualification would be that its value not fluctuate erratically. As

it is, a key currency is also used as a form in which to hold assets (firms hold working

balances of the currencies in which they invoice, investors hold bonds issued

internationally and central banks hold currency reserves). Here confidence that the

value of the currency will be stable, and particularly that it will not be inflated away in

the future, is critical. The monetary authorities in Japan, Germany and Switzerland in the

1970s established a better track record of low inflation than did the United States, which

helped their bids for international currency status. As recently as the 1980s, the mean

and variance of the inflation rate in the United States were both higher than in those

three hard-currency countries, though lower than in the United Kingdom, France, Italy

and many other countries (e.g. Tavlas and Ozeki 1991).

Given the good US inflation performance in the 1990s, this is no longer such a concern as

it was formerly. A more important negative for the dollar is the fact that the United


26/33


States is now a large-scale debtor country. Even if the Federal Reserve never succumbs

to the temptations or pressures to inflate away the US debt, the continuing US current

account deficit is always a likely source of downward pressure on the dollar. Such fears

work to make dollars unattractive.

Network externalities. International money, like domestic money, derives its value

because others are using it. It is a classic instance of network externalities. In this sense,

the intrinsic characteristics of a currency are of less importance than the path-

dependent historical equilibrium. There is a strong inertial bias in favor of using

whatever currency has been the international currency in the past.

One can make an analogy with language. If one sat down to design an ideal language, itwould not be English. (Presumably it would be Esperanto.) Nobody would claim that the

English language is particularly well-suited to be the worlds lingua franca by virtue of

its intrinsic beauty, simplicity or utility. It is neither as elegant nor euphonious as

French, for example, nor as simple and logical in spelling and grammar as Spanish or

Italian. Yet it is certainly the language in which citizens of different countries most often

converse and do business, and increasingly so. One chooses to use a lingua franca, as one

chooses a currency, in the belief that it is the one that others are most likely to use.

Krugman (1984) showed how there can be multiple equilibrium in use of an

international currency, developing some informal ideas of earlier authors such as

Kindleberger (1981), McKinnon (1979) and Swoboda (1969). Matsuyama et al. (1993)

went to the next level of abstraction analyzing this problem with the theory of random

matching games (see also Rey 2001).

The implication is that small changes in the determinants will not produce

corresponding changes in the reserve currency numbers, at least not in the short run. At

a minimum, changes will show up only with a long lag. As noted, the pound remained an

important international currency even after the United Kingdom lost its position as an

economic superpower early in the century. In the present context, the inertial bias

favours the continued central role of the dollar. Also, as already noted, economies of

scale suggest that, even in the long run, measures of international currency use may not

be linear in the determinants. There may be a tipping phenomenon when one currency

passes another.


27/33


What role will the euro play as a reserve currency?

Given these structural advantages of the US there are strong reasons to assume that the dollar

will remain the international reserve currency No. 1 in the decades to come. Nevertheless, the

euro has the potential to play a bigger role as a reserve currency, well beyond its last reported

share of 26.5% at the end of 2007

Looking ahead it is practical to differentiate between the period until 2010 and beyond 2010.

There are several conceivable scenarios for the phase by 2010.

In a first extreme-case scenario the process of shifting into the euro could occur relatively

quickly within a few months, assuming central banks utilized the current phase of dollar

weakness to reduce their cluster risk by diversifying out of the dollar. Although a swift reserve

shift in favor of the euro cannot be ruled out, the probability seems small because many Asiancentral banks are still dollar-oriented and will proceed cautiously to minimize the risk of their

currencies depreciating against the dollar and avoid a decline in reserve value.

In a second extreme-case scenario it is assumed that no diversification is carried out for the

time being, as the existing currency situation between the US and Asia suits all the countries

concerned.

A third scenario combines both the wish for diversification and the desire for value retention,

namely a gradual increase in the euro share to 30-40% by 2010. Still, we consider this our

baseline scenario.

As things stand, there are probably four main drivers that will be essential in shaping the

diversification of foreign exchange reserves into Euros over the medium term:

(1) the EUR/USD exchange rate

(2) changes in exchange rate policies,

(3) central banks rising investment requirement and

(4) the growing appetite for returns.

The euro may benefit from the dollar weakness

Dollar: the exchange rate countsThe dollar exchange rate has been an important determinant

for the dollars role as reserve currency. A period of a low dollar rate vis--vis the euro (or

before 1999 vis--vis the D-mark and the yen) resulted with a time lag of a few years in a

decline in the dollars share in global foreign exchange reserves and vice versa 10. Even in weak

periods the dollar share remained dominant (i.e. over 50%).


28/33


The euro "behaves" differently: In contrast, there is no clear-cut relationship between the euro

exchange rate and the international role as reserve currency. In the period 1999 to 2002 the

euro exchange rate vis--vis the dollar tended to be weak while the euros share in global

foreign exchange reserves climbed from 18% to 25%. The euro share had stabilized at that level

by 2006 even though the euro exchange rate rose considerably. Only in 2007 was the strong

euro exchange rate associated with an increase in the euros share to 26.5%. Looking ahead a

further rise in the exchange rate starting at a value of about USD 1.55 cannot be ruled out

given the uncertainty about the US economy in the wake of the sub-prime crisis. However, it

should not be overlooked that the euro has already reached a very high level against the dollar.

Thus, the risk of a dollar rebound against the euro is growing, making the euro less attractive to

central banks wanting to diversify. The fact that the correction of the global current account

imbalances is under way and the Chinese Yuan has witnessed a tangible up-valuation againstthe dollar may be regarded as a signal that there is no need for a further major devaluation of

the dollar against the euro. Thus, the exchange rate argument is likely to lose in importance in

favor of the Euro.

Changes in exchange rate policy may support euro use: The fact that countries use the euro as

an orientation yardstick fortheir exchange rate policy implies that they have to hold reserves in

Euros in order to be able to intervene in the euro foreign exchange market of their currency. At

present, about 40 countries align their exchange rate policy with the euro. Furthermore,

currency baskets are increasingly being used as a yardstick for exchange rate policy, with the

dollar and the euro as key components. Such changes in exchange rate policy demand that the

respective central bank hold euro reserves. Recent examples have been China and Russia.

At present, exchange rate policies are under review in many countries around the globe.

Obviously, the trend towards the two corner regimes of either flexible exchange rates or a fixed

exchange rate seems to be over as the number of middle-ground exchange rate models of

pegged but adjustable exchange rates has recently risen. The exchange rate policy of many

countries around the globe is currently challenged by two closely related problems.

The first problem concerns rising inflation rates around the globe mainly due to increasing oil,

other (energy) commodity and agricultural prices. The inflation rate has climbed to 8.3% in

China (May 2008), to 7.4% in India, to 8.1% in the Asean countries and to even 11.6% in the six

countries of the Gulf Cooperation Council. This provokes the question of how these countries

can maintain economic growth in an inflationary environment, and which role the exchange rate

should play with regard to fighting inflation.


29/33


The second problem regards the Feds policy of easy money. Therefore, those roughly 60

countries that use the dollar as anchor currency face the problem of whether a dollar peg is still

compatible with the aim of combating inflation or whether a change in the exchange rate regime

is necessary. Alternatives to a dollar peg are, for instance, a basket solution with the euro as a

key component or even a pure euro orientation. Both cases would generate a need to hold euro

reserves. It is, however, open whether a country that changes its exchange rate policy will

provide detailed information about the role of the euro, e.g. its weight in a currency basket.

Central banks rising investment requirement

Global foreign exchange reserves held by central banks more than tripled to around USD 6,400

bn between the end of 2001 and the end of 2007 compared with cumulative increases in

world trade of two-thirds and in global nominal GDP by two-fifths. The lions share of the

increase in foreign exchange reserves was accounted for by China, other emerging markets in

Asia, and Japan. The main source for reserve accumulation has been the buying of dollars in

foreign exchange markets against local currency. Of all the international foreign exchange

reserves at the end of 2007 about two thirds were held in Asia (excluding Middle Eastern oil

nations), with China and Japan combined accounting for nearly 50%. The accumulation of such

huge reserves went far beyond the level necessary for ex-change rate management. Thus, Asias

central banks are under increasing pressure to reduce their dollar-denominated cluster risk

and diversify into other currencies. China is a special case as it has the largest stock of reserves.

According to unofficial sources some 80% of its foreign exchange reserves are invested in

dollars, i.e. more than the global average share of 64%. China is also a major player with regard

to sovereign wealth funds (SWF). This special type of institutional investors has gained major

importance in holding, managing and/or administering public funds mainly stem-ming from

official reserves at central banks. This is also a vehicle giving the euro a major opportunity to

grab a bigger share of global foreign exchange reserves.

Focus on yield of foreign exchange reserve investments

Given the huge volume of foreign exchange reserves eligible for investment purposes there is a

growing pressure on central banks to sharpen their focus on yields. This is not only true for

central banks in Asia but also in the industrial and oil-exporting countries. The watchword is

diversification and from a yield standpoint in both senses: firstly, by instrument within the

dollar segment and, second-ly, by currency. Diversification moves within dollar segment from

US treasury paper into other securities before July 2007 are likely to have been negatively

affected by the sub-prime crisis. At present, diversification within the dollar segment might still


30/33


be difficult due to a lack of liquidity in many securities markets except US treasuries. This also

offers opportunities for diversification out of the dollar into the euro.

However, the desire for currency diversification and a higher yield on the one hand and the

desire to maintain the value of foreign exchange reserves on the other can be conflictingobjectives. A central bank must thus take into consideration what impact diversification out of

the dollar into the euro could have on its countrys exchange rate against the dollar. A strategy

of massive currency diversification could prompt an appreciation of this central banks currency

against the dollar and this would in turn lead to write-downs of the dollar reserves in national

currency. There are two alternatives: either it decides against currency diversification or it

pursues a clandestine strategy of currency diversification, for instance by transferring part of its

reserves into a separate unit (e.g. a SWF) or to a professional asset manager. However, it is

doubtful whether a central banks investment strategy can prevent a fundamentally driven

appreciation of its own currency against the dollar in the medium run.

What will happen to the euros role as a reserve currency after 2010?

Whether the euro will still be on the rise as reserve currency or even outstrip the dollar after

2010 is closely linked with structural changes that can be expected in Europe, in the US and the

rest of the world. One factor that will remain key for the euro/dollar exchange rate is longer-

term US development particularly with regard to growth and interest rates. US growth isexpected to pick up as of 2010 once the structural problems of the sub-prime crisis are

overcome and the huge US current account deficit has been convincingly reduced to a

manageable level. Then, US growth is likely to be more dynamic than in the euro area.

A longer-term problem of relevance to the euro area is the reduction of growth potential linked

with the demographic developments. Trend growth in the euro area at nearly 2% is around one

percentage point lower than in the US. The contribution of the factor labor will play a key role in

this regard, as determined by the development of working hours per employee, participation

rates and the population. Although working hours and the participation rates in the euro area

have risen in recent years, they are well behind US levels. The euro area is, however, clearly at a

disadvantage in terms of population growth. As the birth rate has been much lower than in the

US in recent decades, population growth will continue to slow in the EMU states. Despite

immigration the population in EMU countries will actually decline in the next ten years.

Reduced future growth potential should, however, dampen the appeal of the euro especially

among central banks focusing heavily on returns and constitute a risk factor for the euro as a

reserve currency. Therefore, the dollar will also remain the most important reserve currency in

the longer run.


31/33


References

http://www.oanda.com/currency/historical-

rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=

CSV&margin_fixed=0

BIS ( Bank of International Settelment)

IMF ( International Monetory Fund)

ECB- Statstical data Warehouse

Joint External Debt Hub (JEDH)9

Dollar-Euro Exchange Rate 1999-2004 - Dollar and Euro as International Currencies,

Rasul Shams, Hamburg Institute of International Economics Discussion Paper, May

2005, pp: 3-5.

THE INTERNATIONAL ROLE OF THE EURO, July 2010,European Central Bank

Big is beautiful in euros but dollars' allure remains

The Birth of the Euroby Robert Solomon, Brookings Review,

The Euro hits the Big time: International Role of the Euro, Deutsche Bank Research,

June 26,2008.

DOLLAR DAZE IN EUROPE Special Report: The Financial Crisis

Why the Euro Will Rival the Dollar by Menzie Chinnw(University of Wisconsin) and

Jeffrey Frankelz(Harvard University)

Why the Euro will Not Rival the Dollar by Adam S. Posen (Peterson Institute for

International Economics.)

EBSCOHost Database

9The Joint External Debt Hub (JEDH) is jointly developed by the Bank for International Settlements (BIS), the

International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD) andthe World Bank (WB). JEDH brings together external debt data and selected foreign assets from international

creditor/market and national sources
http://www.oanda.com/currency/historical-rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=CSV&margin_fixed=0http://www.oanda.com/currency/historical-rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=CSV&margin_fixed=0http://www.oanda.com/currency/historical-rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=CSV&margin_fixed=0http://www.oanda.com/currency/historical-rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=CSV&margin_fixed=0http://www.oanda.com/currency/historical-rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=CSV&margin_fixed=0http://www.oanda.com/currency/historical-rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=CSV&margin_fixed=0http://www.oanda.com/currency/historical-rates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format=CSV&margin_fixed=0


32/33


Appendix 1

Currency Composition of Official Foreign Exchange Reserves (COFER)(In millions of U.S.

dollars)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total foreign

exchange holdings

17,8

1,94

7

19,3

6,28

2

20,4

9,58

0

24,0

7,97

8

30,2

5,07

1

37,4

8,35

8

43,2

0,11

7

52,5

1,37

1

66,9

9,37

3

73,3

7,73

4

81,6

5,66

7

Allocated reserves

1/

13,7

9,70

5

15,1

8,24

4

15,6

9,48

8

17,9

5,91

5

22,2

3,11

0

26,5

5,07

0

28,4

3,54

1

33,1

5,48

3

41,1

9,28

4

42,0

9,96

1

45,6

3,28

6

Claims in U.S.

dollars

9,79,

783

10,7

9,91

6

11,2

2,43

1

12,0

4,67

3

14,6

5,75

2

17,5

1,01

2

19,0

2,53

5

21,7

1,07

5

26,4

1,67

1

26,9

8,42

3

28,3

6,99

7

Claims in pounds

sterling

39,8

27

41,7

98

42,4

01

50,5

37

61,6

55

89,4

57

1,02,

243

1,45,

205

1,92,

675

1,68,

793

1,95,

574Claims in Japanese

yen

87,9

39

92,0

78

79,1

90

78,1

45

87,6

08

1,01,

787

1,01,

769

1,02,

051

1,20,

480

1,31,

901

1,37,

515

Claims in Swiss

francs

3,17

2

4,08

7

4,37

2

7,31

4

5,01

6

4,41

9

4,14

3

5,68

5

6,39

5

5,79

9

4,94

1

Claims in euros2,46,

950

2,77,

693

3,01,

026

4,27,

327

5,59,

246

6,58,

531

6,83,

809

8,31,

947

10,8

2,28

6

11,1

2,20

6

12,4

5,78

0

Claims in other

currencies

22,0

34

22,6

72

20,0

69

27,9

19

43,8

33

49,8

65

49,0

41

59,5

20

75,7

78

92,8

39

1,42,

479

Unallocatedreserves 2/ 4,02,242 4,18,039 4,80,092 6,12,063 8,01,961

10,9

3,288

14,7

6,576

19,3

5,888

25,8

0,089

31,2

7,773

36,0

2,380

Exchange Rates 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Pound sterling per

U.S. dollar

0.61

90.67

0.68

90.62 0.56

0.51

8

0.58

1

0.50

9

0.49

9

0.68

6

0.61

7

Japanese yen per

U.S. dollar

102.

2

114.

9

131.

8

119.

9

107.

1

104.

12

117.

97

118.

95114

90.7

5

92.0

6

Swiss franc per

U.S. dollar1.6

1.63

7

1.67

7

1.38

7

1.23

7

1.13

2

1.31

41.22

1.12

6

1.06

4

1.03

1

Euro per U.S.

dollar

0.99

5

1.07

5

1.13

5

0.95

4

0.79

2

0.73

4

0.84

8

0.75

9

0.67

9

0.71

9

0.69

4

Source: IMF Statistics Department COFER database and

International Financial Statistics


33/33

Appendix 2

Outstanding international

debt securities,US$ Billion

Global Measure Narrow MeasureCurrent Prices

1999 7,34816,02

16,535 4,915 628

1,48

4484 436

2000 7,43916,98

36,208 4,917 727

1,70

1471 489

2001 7,71118,44

15,936 5,073 823

1,79

3426 516

2002 9,94919,80

06,827 5,909

1,10

8

1,89

6411 648

2003

13,26

3

21,40

9 8,321 7,275

1,56

0

2,13

0 439 828

200415,81

4

23,27

99,400 8,846

1,97

0

2,38

6456

1,03

1

200515,04

1

25,32

68,851 9,727

1,92

4

2,70

7401

1,12

7

200618,74

4

28,17

78,905

11,90

2

2,45

1

3,45

6413

1,50

7

200723,30

4

31,24

09,464

14,45

6

3,10

7

4,18

3510

1,85

3

200825,40

7

31,76

0

10,84

9

14,98

2

3,41

4

4,22

2593

1,94

9

Q226,23

8

32,15

7

10,15

5

15,62

7

3,53

8

4,31

6578

2,01

6

Q324,05

8

32,75

9

10,29

9

14,67

0

3,22

2

4,33

7593

1,82

3

Q424,21

5

33,12

1

11,83

2

13,80

8

3,09

5

4,29

2654

1,56

8

200923,96

8

33,85

3

10,94

3

13,68

4

2,96

0

4,33

3597

1,54

2

Q226,18

0

34,12

2

11,45

9

15,57

9

3,20

1

4,47

1600

1,74

6

Q327,54

5

34,51

8

12,34

2

16,58

0

3,34

8

4,59

5 6271,77

2

Q427,15

2

34,81

1

12,22

9

17,03

7

3,24

8

4,73

3598

1,75

8

Sources: BIS and ECB

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