Chinese Renminbi struggles forward in slow micro-steps.
If the US dollar loses its hegemony as a global reserve currency, it would be a sea change globally, and specifically for the US economy. Today, we got the next installment in that saga, via the IMF’s quarterly COFER data on foreign exchange reserves.
Total global foreign exchange reserves in all currencies ticked up 1.1% from the first quarter, to $11.7 trillion. US-dollar-denominated exchange reserves rose only 0.7% to $6.79 trillion, and their share of total global foreign exchange reserves fell to 61.63%, down from 61.86% in the prior quarter. And this has been going on for years in baby steps:
The US dollar’s share of global reserve currency declines when central banks other than the Fed proportionately reduce their dollar-denominated assets and add assets denominated in other currencies.
Compared to the mega-moves in the 1970s, the recent moves have been muted. Nevertheless, the current share of USD-denominated foreign exchange reserves of 61.63% is the lowest since the year-end in 2013. The bump in 2014, 2015, and 2016 has now been unwound:
These US-dollar-denominated exchange reserves are US Treasury securities, US corporate bonds, and other financial assets that central banks other than the Fed are holding in their foreign exchange reserves. The Fed’s own holdings of Treasury securities and Mortgage-Backed Securities are not included in “foreign exchange reserves.”
However, the Fed’s holdings of foreign-currency denominated assets are included in the other currencies. Unlike some other central banks, the Fed holds just a smidgen in foreign currency assets – currently $20.6 billion worth, compared to, for example, China’s $3.1 trillion in foreign exchange reserves.
Euro fails to dethrone dollar.
The euro has been replacing in phases the national currencies of EU member states, starting with five currencies, which included the Deutsche mark, a major reserve currency at its time, but way below the dollar. A huge amount of optimism was attached to the euro when it arrived. The predecessor currency assets converted into euro assets, but central banks then piled on additional euro assets. During the early phases, the dollar’s share dropped from 71.5% in 2001 to 66.5% in 2002.
Today, if the 19 member states in the Eurozone were one country, it would be the largest economy in the world. Combining these European currencies into one currency gave rise to the hope in the early days of ending the dollar hegemony. The goal was for the euro to achieve parity with the dollar. These hopes were brutally derailed by the euro sovereign debt crisis, and the euro got stuck at a share of around 20% — 20.3% in the second quarter 2019.
The Chinese renminbi grows but barely registers.
Since its inclusion in the IMF’s currency basket – the Special Drawing Rights (SDR) – in October 2016, the Chinese renminbi has been officially a global reserve currency. But the patience of folks who’re hoping that the renminbi would quickly knock the dollar off its perch continues to be severely tested: In the second quarter, the share of the renminbi ticked up a smidgen to a record but tiny share of 1.97%.
In the overall scheme of things
The chart below shows the dollar’s slowly declining but still hegemonic share of foreign exchange reserves, the euro’s essentially flat share, and the other reserve currencies’ comparatively tiny share. The renminbi (RMB) is the short red line near the very bottom:
To shed some light on the tangle of currencies at the bottom of the chart above, it’s useful to look at them without the US dollar and the euro overshadowing the neighborhood:
- The yen’s share rose from around 3.5% in 2015 to 5.4% currently, blowing past the pound sterling (GBP).
- The renminbi’s share rose from 1.07% in 2016 to 1.97% currently. While still a tiny share for the currency of the second largest economy in the world, it has nearly doubled in three years, surpassing the Australian dollar and the Canadian dollar.
- The share of “other currencies” plunged in 2016, with the arrival of the renminbi. Before the renminbi was an official reserve currency, it was already held as a reserve currency, but the IMF listed it among “other currencies.” Those two were split in 2016.
Not every central bank discloses to the IMF how its foreign exchange reserves are “allocated” among currencies. But the disclosures are growing. In 2014, only 59% of the foreign exchange reserves had been “allocated” to specific currencies. By Q2 2019, allocated reserves reached 94% of total reserves.
Reserve currency and trade deficits.
The US has the largest trade deficit in the world. And it has the dominant reserve currency. So there has been the theory that the US, in order to have “the” global reserve currency, “must have” a large trade deficit with the rest of the world. But this “must have” is disproven by the euro, the second largest reserve currency, and the yen, the third largest reserve currency: their economies have large trade surpluses with the rest of the world.
The relationship is the other way around: The US dollar being the largest reserve currency (and the largest international funding currency) permits the US to easily fund its trade deficits. The reserve currency status of the dollar has enabled policies by the US government and actions by Corporate America that ultimately have led to the huge trade deficits that took off three decades ago and have continued to balloon.
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