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Russia Weighs Shifting Its Holdings to Euros

The euro rose to another record high against the dollar today after the Russian central bank said it might increase its euro holdings in an effort to insulate itself against further weakness in the American currency.

Like the United States Federal Reserve and its other counterparts, the Russian central bank holds huge reserves of dollars, euros and other currencies as a means of defending its own currency, the ruble, and smoothing out foreign-exchange market movements whenever necessary. Nearly two-thirds of its $113 billion in foreign-exchange and gold reserves are denominated in the dollar, which has reigned for decades as the premier global reserve currency.

Alexei Ulyukayev, first deputy chairman of the Russian central bank, said today that the institution was considering altering the mix of its holdings, a move that the Russian bank and others have been hinting at for some time.

"Most of our reserves are in dollars and that's a cause for concern," Bloomberg News quoted him as saying in Moscow. "Looking at the dynamics of the euro-dollar rate, we are discussing the possibility to change the reserve structure."

That possibility further weakened the dollar today and sent the euro as high as $1.31 for the first time. The euro was recently quoted at $1.3082 in afternoon trading in New York, compared with $1.3038 late Monday. So far this month, the euro has risen 2.5 percent against the dollar, giving it a total gain of more than 11 percent over a year ago.

The euro has borne the brunt of the dollar's decline, as Asian central banks seek to prevent their own currencies from climbing, so as to prevent a loss of competitiveness for their exports.

The dollar showed little change today against the Japanese yen, edging up to 103.41 yen in afternoon trading in New York from 103.25 yen late Monday.

With the dollar falling, and the euro acting as the pressure valve, analysts said it was a logical step for the Russians to consider adding to their euro reserves, which now make up less than one-third of overall foreign-exchange and gold reserves. Much of Russia's trade is conducted with the 12 European countries that use the euro, but much of the inflow of foreign capital is in the form of dollars, for Russian oil.

"It makes sense for their reserves to accurately reflect where their trading is," said Paul Mackel, a currency strategist at ABN AMRO in London.

"For the weakening dollar," he added, "it's more fuel on the fire."

Over the last nine trading days, the dollar has weakened against the euro during all but two of those sessions, with the euro rising to levels it had not previously touched during its nearly six-year life. Though European politicians have called on American policymakers to do something to stem the dollar's fall, which makes European goods more expensive in America, the Bush administration seems willing to let the dollar depreciate further, currency market analysts say.

At two international gatherings over the weekend - the Group of 20 industrial and developing countries and the Asia-Pacific Economic Cooperation forum - American policymakers chose not to focus on the dollar in their public pronouncements. That sent a message of "benign neglect" about the dollar to the currency markets, Mr. Mackel said.

The comments today by Mr. Ulyukayev, the Russian central banker, followed a warning from Alan Greenspan, chairman of the Federal Reserve, that overseas investors, who have been pouring money into the United States in recent years, might start to diversify into nondollar-denominated assets.

"A diminished appetite for adding to dollar balances must occur at some point," Mr. Greenspan said at a gathering of bankers in Frankfurt on Friday.

Economists, too, have said such a shift is inevitable given the size of the United States' current-account deficit, a broad measure of America's trade in goods and services. Because the United States imports far more than it exports - the current-account deficit is running at 5.7 percent of the nation's gross domestic product - it has required huge inflows of funds from the rest of the world to keep the dollar buoyant.

Stephen Jen, head of global currency research at Morgan Stanley in London, said Mr. Greenspan's comments might indicate that the Fed is growing increasingly concerned about the size of the American trade and now sees a weaker dollar as the only way to shrink it.

"If the theme 'drive the dollar lower to help narrow the U.S. current account deficit' gains momentum in the U.S., the dollar would effectively be devalued," Mr. Jen wrote in a note to investors.

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