“Surprisingly, the reduced role of the dollar over the past two decades has not been accompanied by increases in the share of the other four major currencies: the euro, the yen and the pound. “Rather, it has been accompanied by an increase in the proportion of what we have called non-traditional reserve currencies, including the Australian dollar, the Canadian dollar, the Chinese renminbi, the South Korean won, the Singapore dollar and the Nordic currencies,” explain IMF economists Serkan Arslanalp, Barry Eichengreen and Chima Simpson-Bell.
According to Fund technicians, these non-traditional reserve currencies are attractive to reserve managers because provide diversification and relatively attractive returnsand because they have become increasingly easier to buy, sell and hold with the development of new digital financial technologies – such as automatic market creation and automated liquidity management. “This recent trend is even more surprising given the strength, or so it would seem from the change in relative prices.” At the same time, this observation reminds us that exchange rate fluctuations can have an independent impact on the monetary composition of central banks’ reserve portfolios.
While changes in the relative values of different government securities, reflecting movements in interest rates, can have a similar impact, although this effect will tend to be smaller, to the extent that bond yields in major currencies They generally vary at the same time.
“In any case, these valuation effects only reinforce the general trend. From a broader perspective, over the past two decades, the fact that the value of the dollar has remained virtually unchanged, while the dollar’s share of global reserves has declined, indicates that central banks have indeed been moving away from gradually from the dollar”they point out.
At the same time, they highlight that statistical tests They do not indicate an accelerated fall in the proportion of dollar reserves, contrary to claims that US financial sanctions have accelerated the move away from the dollar.
It is certainly possible, as some have argued, that the same countries seeking to stop holding dollars for geopolitical reasons do not report information on the composition of their reserve portfolios to the COFER. That’s why they remember that The 149 reporting economies represent up to 93% of global foreign exchange reserves, in other words, the non-reporting ones constitute only a very small proportion of global reserves.
Chinese renminbi gains share
The IMF survey shows that a non-traditional reserve currency that is gaining market share is the chinese renminbi, whose gains equal a quarter of the decline in the dollar’s share. In this regard, they explain that the Chinese government has been promoting policies on multiple fronts to promote the internationalization of the renminbi, including the development of a cross-border payment system, the extension of swap lines and the piloting of a central bank digital currency. Therefore, “it is interesting to note that the internationalization of the renminbi, at least measured by the currency’s reserve ratio, shows signs of stagnation.”
The most recent data does not show a new increase in the renminbi’s monetary share: some observers may suspect that The depreciation of the renminbi exchange rate in recent quarters has masked increases in reserve holdings of that currency, However, even adjusting for exchange rate variations it is confirmed that the share of the Chinese currency in reserves has decreased since 2022.
“Some have suggested that what we have characterized as a continued decline in dollar holdings and an increase in the share of non-traditional currency reserves actually reflects the behavior of a handful of large reserve holders.”argue the Fund’s economists.
For example, Russia has geopolitical reasons to be cautious about holding dollars, while Switzerland, which has built up reserves over the past decade, has reason to hold a large fraction of its reserves in euros, with the eurozone being its geographic neighbor and most important trading partner. But when Russia and Switzerland are excluded from the COFER aggregate, using data published by their central banks from 2007 to 2021, the Fund found little change in the overall trend.
“In fact, this movement is quite broad. In our 2022 document, we identify 46 active diversifiers, defined as countries with a proportion of foreign exchange reserves in non-traditional currencies of at least 5% at the end of 2020. These include major advanced economies and emerging markets, including most countries, G20 economies. By 2023, at least three more countries (Israel, Netherlands, Seychelles) will have joined this list.”
“We also found that financial sanctions, when imposed in the past, induced central banks to modestly shift their reserve portfolios away from currencies, which risk being frozen and redistributed, in favor of gold, which can be stored in the country and thus is free from the risk of sanctions.”
That work also demonstrated that central bank demand for gold responded positively to global economic policy uncertainty and global geopolitical risk. “These factors may be behind further accumulation of gold by several emerging market central banks. However, before exaggerating this trend, it is important to remember that gold as a proportion of reserves remains historically low.”
Therefore, the IMF concludes that The international monetary and reserve system continues to evolve, and the prominent patterns -very gradual move away from the dominance of the dollar and an increasing role of non-traditional currencies of small, open and well-managed economies, enabled by new digital trade technologies- they remain intact.
