FX reserves set to boost single currency After slowing to a crawl during last year's financial turmoil, growth in countries" foreign exchange reserves is speeding up. In foreign exchange markets, where government buying and selling can move prices significantly, that growth in sovereign reserves has ramifications for the world's reserve currencies. The long-run winner, notwithstanding recent turmoil surrounding the eurozone debt crisis that a survey shows has made central bankers shun euro-denominated assets, could yet be the single currency, according to analysts. Strategists say that, if the euro does emerge as a relative winner, it will only be because the other big currency options - the Japanese yen, sterling, US dollar and Swiss franc - are even more unappealing than the existentially troubled single currency. The Japanese government is prioritising growth and inflation at the expense of the yen, the Swiss franc is a managed, relatively illiquid, currency with an effective ceiling on further gains, and the dollar's long-term value is in question. Sterling is the other viable option but is a smaller market and one that burned investors in 2007-2008. Furthermore, the UK has weak fundamentals of its own to contend with. As Steven Englander, Citi's head of G10 forex strategy, puts it, among the majors, reserve managers must "choose between the vampire and the werewolf; the euro and the dollar." At the moment, it can be argued the vampire appears to have the upper hand. One reason for this is a link between recent euro strength and reserve growth, which increases in so-called risk-on environments typified by flows from low-yielding assets to higher-yielding emerging economies. True, in the second half of 2011, as reserve growth slowed markedly, the euro fell more than 10 per cent against the dollar. But, since then, BNP Paribas analysts note that "monthly data for the first quarter of 2012 suggest that foreign reserve growth has recovered significantly, with the improvement led by Asia and, in particular, China." The euro also arrested its slide to gain back near 7 per cent by mid-February. The China connection is important. China's enormous reserves shrank for the first time in more than a decade in the last quarter of 2011 but rose again in 2012, closely tracking euro losses and gains. The relationship between China's foreign currency reserves and the euro-dollar exchange rate has strengthened significantly over the past decade; the more reserves (or dollars) China accumulates, the more euros it buys. China already has heavy exposure to the dollar, with estimates putting China's dollar-denominated reserves at about 60 per cent. Beijing is in effect forced to diversify away continuously from the dollar to avoid its exposure becoming too unwieldy. If it had to sell its dollar-denominated assets in quantities large enough to alter significantly the composition of its reserve portfolio, it could undermine the value of its own holdings. Niche currencies such as the Canadian dollar and the Scandinavian currencies have also benefited from this diversification trend. Adjusted for valuation, the International Monetary Fund's "other" category of forex reserves increased almost 6 per cent from a low base compared with just 2.6 per cent for euro-denominated reserves. Bank of New York Mellon's Simon Derrick identifies the Australian dollar, which "gained a very robust 5.7 per cent against the US dollar over the quarter," as the likely main beneficiary. But there is a limit to how much these niche currencies can benefit. The International Monetary Fund predicts global official reserves will increase 61 per cent by the end of 2016, an amount equivalent to almost $1.25tn a year - sums too high to park in less liquid emerging market currencies. So, "all things being equal," says Mr Englander, "that means buying the euro, as long as tail risk is under control, as reserve managers already have plenty of dollars and plenty of dollar scepticism." That said, in the past five weeks the euro has stopped climbing and has traded within a narrow range as global risk sentiment has soured. That could point to a slowing in reserve growth or, if survey evidence is accurate, managers being forced to shun the single currency as the eurozone crisis reflares. Yet analysts also point to the single currency's low volatility during recent eurozone tumult, a characteristic they say can be explained by sovereigns buying the euro on dips. Thus, it could well continue benefiting from what might be termed "accidental privilege," or few alternatives.