[cppene]

The reserve diversification issue came up again yesterday following press reports that Central Reserve Bank of Peru could seek to reduce the dollar's share in its reserves to 62% from 82%. The Central Reserve Bank of Peru has gross reserves of about USD30bn (in comparison with China's USD2trn), so the amounts involved are relatively small, but it nonetheless led to some weakness in the USD. The news underlines the fact that despite there being no immediate viable alternative to the dollar as the dominant global reserve currency, the FX market remains sensitive to talk of reserve diversification.

Also, the main beneficiaries of the dollar sell-off were the commodity currencies, in particular the AUD and NZD. Part of the reason is that they are high-beta currencies with respect to the USD. But it could also be related to an FT report yesterday that China is seeking to use its part of its vast reserves to make direct investments in resource-rich developing economies. This is consistent with commodity currencies being among the main beneficiaries of reserve diversification. EM Asian currencies that could similarly benefit are the PHP and IDR, which are also resource-rich countries with open foreign investment policies.