Is the euro dead yet? And how is the Chinese Renminbi doing?
Total global foreign exchange reserves, in all currencies, rose to $11.4
trillion in the fourth quarter 2018, according to the IMF’s just released
COFER data. These foreign exchange reserves do not include the Federal
Reserve’s holdings of dollar-denominated assets, such as Treasury securities
and mortgage-backed securities. But the amount of USD-denominated exchange
reserves ticked down to $6.62 trillion, and the dollar’s share of global
foreign exchanges reserves dropped to 61.7%, the lowest since 2013.
In 1999, the euro became an accounting currency in the financial markets,
replacing the European Currency Unit. On January 1, 2002, Euro banknotes were
released into circulation and gradually replaced the national banknotes of
the original member states of the Eurozone. Note the drop of the dollar’s
share, from 71.5% in 2001 to 66.5% in 2002. Today, the euro has replaced 19
national currencies. And the dollar’s share is down to 61.7%:
In Q4, the euro’s share of foreign exchange reserves rose to 20.7%, the highest
since Q4 2014. The creation of the euro – the idea of eventually
consolidating all European currencies in one big currency – was an effort to
knock the dollar off its hegemonic pedestal. The goal was for the euro to
eventually reach “parity” with the dollar. Then the euro debt crisis
happened.
The degree of dominance of the US dollar as global reserve currency is
determined by the amounts of US-dollar-denominated financial assets – US
Treasury securities, corporate bonds, etc. – that central banks other than
the Fed are holding in their foreign exchange reserves. The dollar’s role as
a global reserve currency diminishes when central banks shed their dollar
holdings and take on assets denominated in other currencies.
The combined share of the dollar and the euro edged down to 82.4% in Q4
2018. The remaining currencies make up 17.6% of allocated global reserve
currencies. On October 1, 2016, the IMF added the Chinese renminbi to its
currency basket, the Special Drawing Rights (SDR), elevating it to an official
global reserve currency. Hopes by some folks that it would dethrone the
dollar as hegemon have been disappointed. But little by little, the renminbi
is gaining. In Q4 2018, with a share of 1.89%, it beat the Canadian dollar
for the first time and moved up to fifth place on the list:
- Dollar: 61.7%
- Euro: 20.7%
- Japanese yen: 5.2%
- UK pound sterling, at 4.4%.
- Chinese renminbi: 1.9% (record)
- Canadian Dollar: 1.8%
- Australian dollar: 1.6%
- Swiss franc: 0.15%
- Other: 2.48%
This chart shows the battle among the lesser reserve currencies (without
the dollar and the euro). Note the surge of the yen’s share from 3.6% in 2014
to 5.2% at the end of 2018. The renminbi is the red line that starts in 2016.
The share of “other currencies” dropped that year as the renminbi became an
entry. The IMF doesn’t disclose details, but we can assume that the renminbi
had been listed under “other currencies” until 2016, when it was separated
out.
But with the USD and the EUR added to the chart, the other currencies are
reduced to their place at the bottom, with the Chinese renminbi (bright red
line at the bottom) still near irrelevance:
As the IMF points out, this data is based on the currencies’ share of
“allocated” reserves. Not all central banks disclose to the IMF how their
total foreign exchange reserves are “allocated” among specific currencies.
But disclosure has increased and the data is becoming more complete. In Q4
2014, “allocated” reserves accounted for only 59% of total reserves; now they
account for 94%.
And a special word about the theory that the US, as the country with “the”
global reserve currency, “must have” a large trade deficit
with the rest of the world. This “must have” is clearly not
the case because the Eurozone – with the second largest reserve currency –
has a large trade surplus with the rest of the world, showing that a
major reserve currency can be backed by a big trade surplus. Japan also has a
large trade surplus.
But there is another way of looking at this: The fact that the dollar is
the largest reserve currency and largest international funding currency allows
the US to easily fund those massive trade deficits, which has made the trade
deficits possible over the past two decades. This may not always be the case
in the future, but so far so good, as they say.
The US trade deficit goes out-of-whack as Corporate America searches
for cheap labor and tax benefits. Read... Good
Lordy, What a Banner Year 2018 was for China, Other Countries, and Corporate
America
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