…while there has been some increase in the share of reserves held in renminbi, this accounts for just one quarter of the shift away from dollars in recent years, partly due to China’s relatively closed capital account. Moreover, an update of data referenced in the working paper shows that, as of the end of last year, a single country—Russia—held nearly a third of the world’s renminbi reserves.
Dollar Dominance and the Rise of Nontraditional Reserve Currencies
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June 1, 2022
By Serkan Arslanalp, Barry Eichengreen and Chima Simpson-Bell
The US dollar has long played an outsized role in global markets. It continues to do so even as the American economy has been producing a shrinking share of global output over the last two decades.
But although the currency’s presence in global trade, international debt, and non-bank borrowing still far outstrips the US share of trade, bond issuance, and international borrowing and lending, central banks aren’t holding the greenback in their reserves to the extent that they once did.
As the Chart of the Week shows, the dollar’s share of global foreign-exchange reserves fell below 59 percent in the final quarter of last year, extending a two-decade decline, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves data.
In an example of the broader shift in the composition of foreign exchange reserves, the Bank of Israel recently unveiled a new strategy for its more than $200 billion of reserves. Beginning this year, it will reduce the share of US dollars and increase the portfolio’s allocations to the Australian dollar, Canadian dollar, Chinese renminbi and Japanese yen.
As we document in a recent IMF working paper, the reduced role of the US dollar hasn’t been matched by increases in the shares of the other traditional reserve currencies: the euro, yen, and pound. Moreover, while there has been some increase in the share of reserves held in renminbi, this accounts for just one quarter of the shift away from dollars in recent years, partly due to China’s relatively closed capital account. Moreover, an update of data referenced in the working paper shows that, as of the end of last year, a single country—Russia—held nearly a third of the world’s renminbi reserves.
By contrast, the currencies of smaller economies that haven’t traditionally figured prominently in reserve portfolios, such as the Australian and Canadian dollars, Swedish krona and South Korean won, account for three quarters of the shift from dollars.
Two factors may help to explain the movement into this set of currencies:
- These currencies combine higher returns with relatively lower volatility. This appeals increasingly to central bank reserve managers as foreign exchange stockpiles grow, raising the stakes for portfolio allocation.
- New financial technologies—such as automatic market-making and automated liquidity management systems—make it cheaper and easier to trade the currencies of smaller economies.
In some cases, the issuers of these currencies also have bilateral swap lines with the Federal Reserve. This, it can be argued, creates confidence that their currencies will hold their value against the dollar.
The Yuan’s weight is increased by 1.36% to 12.28% but the US Dollar’s weight is increased by 1.65% to 41.73%
Dollar sweeps back as haven of choice as everything gets sold
May 06, 2022 16:09 pm +08
(May 6): The dollar is powering ahead against almost all its major peers, buoyed by higher Treasury yields and a sell-off of stocks that is turbocharging demand for the world’s reserve currency.
Bloomberg’s gauge of the greenback gained for the second day, approaching a two-year high set last month as investors sought shelter amid concern US Federal Reserve (Fed) interest-rate hikes will send the global economy into a recession. The risk-sensitive Norwegian krone and Australian dollar were among the biggest losers on Friday (May 6), while stock markets across the globe continued to tumble as investors flocked to the haven greenback.
“You’re probably not wanting to plonk your money down anywhere else other than dollars when all you’re focused on is safety,” said Vishnu Varathan, the head of economics and strategy at Mizuho Bank Ltd in Singapore. “The dollar is the only safe prize in town right now.”
A mix of higher interest rates and geopolitical uncertainty has boosted the Bloomberg Dollar Spot Index by more than 6% this year. Relentless dollar strength has hammered the yen in particular, with Japan’s currency sliding almost 12% since the end of December as the Bank of Japan’s dovish monetary policy diverges with the Fed’s hawkish rhetoric.
Elsewhere in Asia, the Taiwan dollar, the South Korean won and the Chinese yuan all dropped at least 0.5%. Emerging-market bonds were also being hammered after US 10-year yields climbed above 3% this week. Sovereign debt slid from South Korea to Malaysia on Friday as investors ditched growth-sensitive assets.
The dollar’s surge raises the spectre of greater intervention by Asian central banks looking to stem the rout in their currencies.
Some measures are already under way. Japanese officials have been vocalising their displeasure of the yen’s “disorderly” moves, while the People’s Bank of China has sought to curb the yuan’s weakness by cutting the amount of money banks need to have in reserves for foreign-currency holdings.
“King dollar still has more to gain over the coming months,” said Rodrigo Catril, a strategist at National Australia Bank Ltd in Sydney, who recommended a core long dollar position in portfolios. “The Fed remains resolute on its quest to quickly get to neutral if not going beyond.”
An $86 Billion Dividend Bill Threatens to Send Yuan Lower
- Chinese companies are poised to ramp up dividend payments
- Potential selling could add to downward pressure on yuan
6 May 2022, 6:00 am MYTUpdated on6 May 2022, 11:08 am MYT
Having plunged by the most on record in offshore trade last month, China’s yuan is now facing the threat of selling pressure from the nation’s companies.
Chinese firms are poised to ramp up dividend payments in coming months, with more than 500 Hong Kong-listed companies to hand out around HK$677 billion ($86.2 billion) this year, according to data compiled by Bloomberg as of Thursday. This summer’s June-August peak is set to be 16% larger in terms of payment size than the same period in 2021.
4 May 2022
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