Dollar will remain as reserve currency, Pimco says

Anthony Crescenzi of Pimco says China and Europe are not developed enough for their currencies to replace the US dollar as reserve currencies. Bloomberg photo

The U.S. dollar will keep its reserve status in 2011 because China and Europe aren’t developed enough for their currencies to replace it, said Pacific Investment Management Co., which runs the world’s biggest bond fund.

“Rising powers such as China are not yet ready to absorb the $9 trillion in reserve assets the world holds, particularly because their bond markets are immature,” Anthony Crescenzi, a money manager at Pimco, wrote in a report Wednesday. “Europe, amid all of its financial woes, is not even close to ready to take the mantle.”

The U.S. “remains the world’s preeminent power economically, politically, and militarily,” Crescenzi wrote.

Growth in currency reserves to a record in 2010 helped curb an increase in Treasury yields as investors outside the U.S. scooped up the nation’s debt. The Obama administration is counting on foreign money managers, who own half of the outstanding $8.75 trillion in marketable Treasury securities, to keep buying as it borrows record amounts.

Low yields in Treasuries

“Support has been superfluous, as evidenced by both the relatively low level of market interest rates and the broad level of participation in the Treasury’s regular auctions,” Crescenzi wrote. “The U.S. will remain a ‘going concern’ and preserve investments in dollar assets, albeit at lower rates of return than in other countries, notably those in the emerging markets.”

U.S. two-year notes yielded 0.64 percent, after falling to a record 0.31 percent on Nov. 4. The yield has averaged 4.14 percent over the last 20 years.

At a Treasury seven-year auction Wednesday, indirect bidders including foreign central banks bought 64.2 percent of the notes, the highest level since June 2009.

Worldwide reserve assets rose to $9.05 trillion on Dec. 3, the most based on data compiled by Bloomberg going back to 2003.

Investors held 62.1 percent of reserve assets in dollars as of June 30, little changed from the end of 2009, according to the International Monetary Fund, or IMF. The figure has fallen from 72.7 percent in 2001. The next-largest holdings are in euros, comprising 26.5 percent, the IMF figures show.

The dollar declined 2.5 percent in 2010, extending a 10 percent slide in 2009, according Bloomberg Correlation-Weighted Indexes.

Pimco’s $250 billion Total Return Fund gained 7.6 percent this year, beating 71 percent of its competitors. The company is a unit of unit of Munich-based insurer Allianz.