By MARTELLA MATTHEWS,Guardian Business Reporter martella@nasguard.com
As the U.S. dollar continues its steep decline on the world currency market, The Central Bank of The Bahamas has adopted a watchful attitude towards the currency in which the majority of its reserves are held.
However according to governor, Julian Francis, the situation was no where near a point where The Bahamas might want to consider divesting itself of its U.S. assets.
This position comes as major Central Banks in the world are shifting their reserves away from U.S. backed assets and deepening their investments in the euro zone.
According to a Financial Times article on a survey conducted by Central Banking Publications during September to December of 2004, 70 per cent of participating central bank reserve managers admitted to increasing their exposure to the euro over the last two years.
The responses by the 65 central banks, which control close to $1,700 billion in assets, were described as a marked change in attitude over the last two years. And although The Peoples Bank of China was reportedly not a participant in this survey, economists in that country have also come out strongly against the declining U.S. dollar.
According to reports by the Associated Press, director of the National Economic Research Institute at the China Reform Foundation, Fan Gang is pushing for limited exposure of the yuan to the U.S. dollar.
He described the dollar as "no longer" a "stable currency." He suggested that there might need to be a re-evaluation of pegging the yuan to the U.S. dollar, with a peg to the euro or the yen being a possibility. China's exchange rate policies restrict the value of its currency to 8.28 yuan to U.S. $1.
While the falling value of the U.S. dollar was something that was being closely monitored by the Central Bank of The Bahamas, Governor Francis says that the strong economic ties the country currently has to the North American country makes a bigger case for keeping most of the reserves in U.S. assets.
"North America is really the dominant trading partner of The Bahamas," he said. "From the point of view of tourism, the United States accounts for 70 per
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cent of our tourism business... it makes a lot of sense that our currency is the same as our major trading partner; it eliminates many issues that would otherwise arise."
He added that the reality that most of the country's borrowing commitments were also in U.S. dollar only strengthened the tight link to this currency.
But despite this strong tie, the central bank does at times use the declining dollar as an opportunity to strengthen its holdings in other currencies namely the euro and sterling.
He noted that this is done mainly because the country does have obligations in other currencies and if the central bank is not a holder of these currencies, buying them with the U.S. dollar exposes the country to price risks.
Overall, Mr Francis emphasised that because the bank is not at all interested in currency speculation, the majority of the reserves will always be in U.S. backed assets.
"We invest the reserves on a more long term basis and we seek to manage our currency risks but generally speaking we are not interested in speculating on the currency market," he said.
Although steadfast on the country's current relationship with the U.S. dollar, the central bank governor noted that close attention was being paid to the changes occurring within the economy, especially the ones that were trending towards closer trading ties with China.
But although he predicted a diversification of the trade patterns for The Bahamas, Mr Francis was hesitant that this would lead to any major shifts.
The governor was also very bullish on the dollar rebounding.
"The U.S is an extremely dynamic economy," he said. "They are going through a period which is difficult but at the same time, you can deny the power of the United States economy. Its an incredibly dynamic machine."
Giving his outlook on the currency, Mr Francis predicted a continued decline in 2005. But he was optimistic that as the United States continually increases interest rates and work towards bringing the deficit under control, the dollar would begin a period of stabilization and even recovery.
"We will manage our reserves with that in mind," he said.
Additional information obtained from the Financial Times and the Associated Press.
