The Brics(Brazil, Russia, India and China) are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the US currency.
Brazil, Russia, India and China increased foreign reserves by more than $60 billion in May to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July.
While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is proposing the Brics consider creating a new unit of exchange when they meet in Yekaterinburg on June 16. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries.
“Foreign central banks do not want to see their currencies relentlessly strengthen,” said Daniel Tenengauzer, head of foreign-exchange and emerging-market debt strategy at Bank of America-Merrill Lynch in New York. “Such a move would dampen an already-weak outlook outside the US and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline.” The US currency rallied in Asia today, gaining 1.3 per cent against the Indian rupee to 47.74. Russia’s rouble fell 1.8 per cent to 31.42 a dollar in London trading, while the yuan’s 12-month offshore forward contract, an agreement to buy an asset in the future, fell 0.5 per cent to 6.731.
Real’s rally
International reserve assets excluding gold held by the Brics, an acronym coined by Goldman Sachs Group’s Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, total $2.8 trillion, a 7.8 per cent increase from a year ago and 42 per cent of the world’s total. The real, rouble, and rupee strengthened and the dollar index posted its biggest decline in 24 years last month as signs the global recession may be easing spurred investors to seek higher-yielding alternatives to the US currency. A net $26.1 billion has flowed into emerging-market equity funds this year, EPFR Global, which tracks $11 trillion worldwide, said June 4.
The real rallied 11.2 per cent last month, the rouble gained 6.9 per cent and the rupee 6.4 per cent. The yuan appreciated 21 per cent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.
The dollar index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, lost 6.4 per cent last month, the biggest decline since March 1985. It rose 0.9 per cent on Monday.
