Rising dollar may prompt central bank selling

By Jamie McGeever

LONDON (Reuters) - If the dollar's decline is over and about to give way to a prolonged upswing, there will be one group of influential market players unlikely to jump on the bandwagon: central banks.

Much has been made during the dollar's seven-year fall of central banks' management of their reserves portfolios, which now total several trillion dollars, and their supposed dumping of dollars for euros and other currencies.

The flipside of that logic would contend that as the dollar rises, so central banks buy more of them, right?

Not quite. International Monetary Fund data on global currency reserves suggests central banks tend to buy more dollars to maintain reserves portfolio balances when the greenback is depreciating and less when it's appreciating.

Also, those central banks which have currencies pegged to or closely tracking the dollar -- policies that fuelled an explosion of global reserves during the greenback's multi-year decline -- may now need to sell dollars to maintain status quo.

Simply put, the diversification out of dollars in recent years has been exaggerated. And any dollar recovery may actually prompt central banks to increase dollar sales.

Brad Setser, a Fellow in Geoeconomics at the Council on Foreign Relations in New York who follows reserves closely, is not convinced of the dollar's long-term recovery but says banks will keep the dollar share of their reserves broadly steady.

"There's a lot less evidence of broad-based diversification out of the dollar (in recent years) than many think," he said.