Chinese RMB gains, but is inconsequential as central banks remain
leery. Euro hangs on.
Those who’re eagerly awaiting the end of the “dollar hegemony,” or the end
of the dollar as the top global reserve currency, well, they’ll need some
patience, because it’s happening at a glacial pace – according to the IMF’s
just released data on the “Currency Composition of Official Foreign Exchange
Reserves” (COFER) for the second quarter 2018.
What it confirms: Global central banks are ever so slowly losing their
appetite for being over-exposed to US-dollar-denominated assets, though
they’re not dumping them from their foreign exchange reserves; they’re just
tweaking them.
They’re not dumping euro-denominated assets either; au contraire.
But they’re giving up on the Swiss franc. And they remain leery of the
Chinese renminbi though they’re starting to dabble in it – it seems at the
expense of the dollar.
In Q2 2018, total global foreign exchange reserves, in all currencies,
rose 3.2% year-over-year, to $11.48 trillion, well within the range of the
past three years. For reporting purposes, the IMF converts all currency
balances into US dollars.
US-dollar-denominated assets among these reserves edged up to $6.55
trillion, but given the overall rise of total foreign exchange reserves, the
share of dollar-denominated assets among these reserves edged down to 62.25%,
the lowest since the period 2012-2013. In this chart of the dollar’s share of
reserve currencies, note its low point in 1991 with a share of 46%. And note
the arrival of the euro:
The euro became an accounting currency in the financial markets in 1999,
thereby replacing the former European Currency Unit (ECU). Euro banknotes and
coins appeared on January 1, 2002. At the end of 2001, the dollar’s share of
reserve currencies was 71.5%. In 2002, it dropped to 66.5%. By Q2 2018, it
was down to 62.25%.
In Q2, the Euro’s share edged up to 20.26%, the highest since Q4 2014. The
creation of the euro has been the most successful effort to reduce the
dollar’s hegemony. Before the Financial Crisis, and the euro Debt Crisis, the
theme in Europe was that the euro would reach “parity” with the dollar on the
hegemony scale. But this talk fizzled out during the euro Debt Crisis.
The latest effort at whittling down the dollar’s hegemony is the elevation
of the Chinese renminbi to a global reserve currency, as of October 1, 2016,
when the IMF added it to its currency basket, the Special Drawing Rights (SDR).
The RMB’s gains make “glacial” appear lightning fast. In the chart below,
the RMB is the thin red sliver with a share of just 1.84%, but this is up
from 1.39% in Q1, and up from 1.2% in Q4 2017 – minuscule, considering that China
is the second largest economy in the world. It seems, central banks remain
leery of holding RMB-denominated assets, but they’re beginning to dabble in
it.
Note the Swiss franc, the barely visible black line in the pie chart
above. It has been in the 0.16% to 0.18% range since Q1 2016, but that’s a
sharp drop-off from its share in prior years.
In the chart below, the black line at the top is the hegemonic US dollar,
whose share of reserve currencies has edged down. The euro (blue line), at
20.26% in Q2, has been vacillating at around 20% for years. The dollar and
euro combined accounted for 82.5% of the allocated foreign exchange reserves
in Q2. The Chinese RMB is the bright red line at the bottom since its
inclusion in Q4 2016. It’s just above the Swiss franc and roughly on par with
the Canadian dollar and the Australian dollar:
All these percentages denote the currencies’ share of “allocated”
reserves. Not all central banks disclose to the IMF how their foreign
exchange reserves are “allocated” by specific currency. But over the years,
disclosure to the IMF has increased. In Q4 2014, “allocated” reserves
accounted for 59% of total reserves. By Q2 2018, this has risen to 91.6%. In
other words, the COFER data is getting more complete.
A word about the relationship between the dollar as the top reserve
currency and the huge trade deficits the US has with the rest of the world:
There is a theory that says that the US, as the country with the top reserve
currency, must have a huge trade deficit with the rest of the world.
What pulls the rug out from under this theory is that the Eurozone, which has
the second largest reserve currency, has a large trade surplus with
the rest of the world.
However, the status of the dollar as the top reserve currency and top
international funding currency allows those trade deficits to be financed and
thus makes those trade deficits possible over the longer run (going on two
decades now).
That Trump is bungling the debate on how to deal with the trade deficits
became clear when he was getting bashed like a sitting duck from all sides:
from Corporate America, China, the EU, other entities that would lose, and
their propaganda outlets in the media. Read… What
I Wrote to the White House about Trade & Tariffs
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