ECB increased holdings of Japanese yen in 2007

FRANKFURT, April 21 (Reuters) - The European Central Bank said it favoured Japanese yen EURJPY= over U.S. dollars EUR= when it used the proceeds of gold sales to boost its foreign currency reserves in 2007.

The ECB said the increase in currency reserves was funded by the sales of 79 tonnes of gold, which were announced in 2007.

“Most of the proceeds were added to the Japanese yen portfolio and, to a minor extent, to the U.S. dollar portfolio,” the ECB said in its annual report.

The ECB said its foreign currency portfolio was worth 32.1 billion euros at the end of 2007 compared to 32.0 billion euros at the end of 2006.

The share of the currency portfolio denominated in dollars fell to 79.7 percent, from 83 percent in 2006, while yen’s share rose to 20.3 percent, from 17 percent.

Gold XAU= and special drawing rights issued by the International Monetary Fund USLD16 accounted for 10.7 billion euros of the ECB's net foreign reserves, up from 10.3 billion euros in 2006 due to an 18-percent rise in the value of gold versus the euro.

The overall value of the ECB’s foreign reserves rose to 42.8 billion euros at the end of 2007 from 42.3 billion euros at the end of 2006, due to profits from gold sales and portfolio management cancelling out the depreciation of the dollar and yen against the euro.

The euro gained 11.8 percent against the dollar, 5.1 percent against the yen and 9.2 percent against sterling EURGBP= in 2007, the ECB said.

Links with the U.S. dollar also caused the euro to gain 12.1 percent versus the Hong Kong dollar EURHKD= and 12.5 percent against the Korean won EURKRW=.

But gains versus the Chinese yuan were smaller, at 4.6 percent.

“The relatively contained appreciation against the Chinese currency reflects, to some extent, the apparent greater willingness of the Chinese authorities to allow a stronger appreciation of their currency against the U.S. dollar, especially towards the end of the year,” the ECB said.

The euro lost ground against the Canadian dollar EURCAD=, Polish zloty, and Norwegian and Czech crowns.

Overall the inflation-adjusted strength of the euro was 5.5 percent higher compared to 2006, the ECB said.

The ECB said the priorities for its portfolio management were liquidity, security and return, in that order.

“In addition, the pilot project set up to establish an automatic securities lending programme for the ECB’s U.S. dollar assets is well advanced and is expected to be implemented in the course of 2008,” the bank added. (Reporting by David Milliken; editing by Stephen Nisbet)