June 12, 2012 / 12:16 PM / 5 years ago

Sovereign reserve managers may give euro a miss

LONDON (Reuters) - Once bitten, twice shy Asian central bank reserve managers could steer clear of adding even more euros to reserves as the euro zone crisis lumbers on.

China, with the world's largest foreign exchange reserves of $3.3 trillion, may be a case in point.

Since 2010, China has bought bonds issued by several European countries. However, with the Chinese economy slowing and domestic political issues to the fore, Beijing may not be so keen to add euros to its coffers.

The euro's exchange rate against the dollar may also make the Chinese authorities think twice.

Between September 1, 2010 and September 30 2011, the range of the exchange rate was $1.2642-$1.4939.

In October 2011, European and IMF officials went to Beijing to seek China's help but were unwilling to offer the market access, guarantees and technology sales the Chinese side demanded.

With the euro trading near $1.2500 on Tuesday, it is clear that from a simple foreign exchange rate perspective, any euros purchased and still held by China during the 12-month period before that October 2011 visit would now be being revalued at a loss.

Any temptation to improve the average price by buying more euros at current lower levels will be inhibited by a number of factors.

The weekend's 100 billion euros rescue package for Spain has not resulted in a burst of market confidence in euro zone periphery assets or the euro itself.

Reserve managers generally, already laden with euros purchased at higher levels, might see little to be gained by trying to pick the bottom in the single currency without surer signs that the wider market is inclined to buy.

It might be better to wait it out.

Traders may recall the early history of the euro when euro zone officials extolled the virtues of the single currency even as it fell from levels near $1.19 in January 1999 to parity in December.

Asian central banks bought euros all the way down but by the time parity was hit, their reluctance to add to, and their frustration about, their existing exposures was clear.

Many such reserve managers became far less active buyers of the euro as it slid further, to $0.8225 on October 26 2000, only turning more positive towards it when the European Central Bank intervened to back its rhetoric with action.

In the context of 2012, a wait-and-see stance might be appropriate, particularly for China where Commerce Minister Chen Deming said on Monday that the country still faces a grim trade outlook.

SLOWING

While China's economic performance stands in marked positive contrast to the euro zone, it is slowing. The yuan has weakened against the dollar since the beginning of May.

That weakening means the Chinese central bank does not have to lean against yuan appreciation by buying greenbacks.

If the central bank does not have to buy dollars, there is no compelling need to convert some of those purchases into euros to keep overall reserves in balance.

At the same time, with China holding its once-a-decade leadership transition this year, there might be little to be gained and much to be lost for the person who decides to pick the base on the euro, if that decision proves wrong.

It may not be good news for the euro, but, for a variety of reasons, reserve managers in general and China in particular might have had their fill of the single currency for the moment.

(Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own)

Editing by Nigel Stephenson

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