The Effect of Composition of Foreign Reserves on the Replacement of Euro with Dollar

According to the recent debates on portfolio allocation of the foreign reserves of central banks and moving from Dollar to Euro, this study is going to empirically investigate the portfolio composition of the central banks of Iran, Russia, Saudi Arabia and Turkey. Since the compositions of the foreign reserves of central banks are not announced precisely, the estimation of the share of Euro in foreign reserves is done according to the time series characteristics of foreign reserves. In this study the share of Euro and Dollar in Foreign reserves of the central banks will be estimated using Kalman Filter. In the euro period, 1999-2008, the share of Euro in foreign reserves of Iran, Russia, Saudi Arabia and Turkey has increased considerably. The evidence shows that all of these countries have diversified their foreign reserves portfolio such that the relative importance of Euro has increased while the relative importance of Dollar has diminished. The share of Euro in the foreign reserves of Iran, Russia and Turkey from 2003 and in Saudi Arabia from 2007 has increased and Euro has become a serious challenger to US dollar. Although the results of the paper show that the share of Euro in the foreign reserves of these countries has increased and Euro has become a serious rival for US dollar, but the answer to the question of whether the Euro will replace the Dollar, is still an important issue and requires further study and empirical evidences.