Reserve managers shun the euro, IMF data shows

Reserve managers reduced their euro holdings by more than $120 billion in the third quarter of 2014, according to the International Monetary Fund's (IMF) latest quarterly Currency Composition of Official FX Reserves (Cofer) report, as the spectre of negative interest rates and further monetary easing in the eurozone weighed on the currency's prospects.

The euro's share of reserves dropped to $1.39 trillion from $1.52 trillion between the second and third quarters of 2014, representing the biggest change of all the currencies on which the IMF receives data. Meanwhile, the share for the US dollar continued to edge higher over the year, making up just over $3.85 trillion of the total $11.7 trillion in FX reserves in developed and emerging market economies.

"The IMF Cofer shows a drop of $124 billion in Q3 euro reserves, which adds up to around $200 billion when adding foreign reserves that don't declare the composition of their foreign reserves to the IMF," says Sebastien Galy, senior currency strategist at Societe Generale in New York.

"This amount, 30% over what was needed, suggests risk management was very severe as board-level committees of reserves downgraded the reserve value of the euro. Weaker members of the eurozone will likely pay a price in the years to come in the form of marginally higher funding costs," he continues.

The sudden euro sell-off was expected due to the European Central Bank's decision to take deposit rates further into negative territory, to -0.2%, in September.

The latest data published by the Fund is a reflection of FX reserves from Q3 2014, and shows total reserves have continued to remain above $11 trillion, having first broken that barrier in Q1 2013, and peaking in Q2 2014 with $11.9 trillion.

Other reserve currencies such as sterling, the yen and the Swiss franc remained fairly stable in 2014, while claims in other currencies realigned at $196 billion, following a huge downturn since 2012 when they topped $357 billion.

This article was originally published in FX Week