However, China's yuan continues to decline.
Written by Wolf Richter of Wolf Street.
The US dollar, which remains the number one reserve currency held by central banks, continues to slowly lose share to other key currency combinations as central banks diversify their dollar-denominated asset holdings to other currency-denominated assets. There is. And they are also increasing their gold holdings.
New COFER data from the IMF shows that the share of US dollar-denominated foreign exchange reserves (US dollar-denominated assets held by central banks other than the Fed) fell to 58.2% of total foreign exchange reserves in the second quarter, the lowest percentage since 1995. It became. .
Over the past decade, the dollar's share has fallen by about 8 percentage points, from 66% in 2015 to 58.2% in 2024 so far. If this pace continues, the dollar's share will reach 50% within 10 years.
A long-term look back to the 1960s shows that the US dollar's share of world reserve currencies was much lower in the 1970s and 1980s. This share collapsed from 85% in 1977 to 46% in 1991 as inflation exploded in the United States in the 1970s and 1980s and the world lost confidence in the Fed's willingness to curb this inflation. .
By the 1990s, inflation had been on a downward trend for a decade, confidence returned, and central banks were once again accumulating dollar-denominated assets, but the euro, which combined Europe's major reserve currencies into one, was introduced and the euro became the leading alternative currency to the euro. dollar.
This graph shows the US dollar share at the end of the year, except for 2024. For 2024, we will use the second quarter numbers.
When converted into dollars, Foreign exchange reserves held by central banks in the second quarter amounted to $12.35 trillion in all currencies. Of this amount, US dollar-denominated asset holdings decreased to $6.68 trillion.
These USD-denominated assets include U.S. Treasury securities held by central banks other than the Fed, U.S. government agency securities, U.S. government-backed MBS, U.S. corporate bonds, and even U.S. stocks.
Central bank assets denominated in local currencies are excluded, such as Treasury securities held by the Federal Reserve and euro-denominated assets held by the ECB.
Central banks are not “releasing” dollar assets. In dollar terms, dollar holdings have not changed much and are not far from their 2021 peak. But as overall foreign exchange reserves increase, central banks are taking in assets. It is denominated in many alternative currencies and is share Of the total decrease.
Other major base currencies.
The euro will forever be in second place. Its share has remained at about 20% for many years. The market share in the second quarter was 19.8% (blue line in the figure below).
The main alternatives to the US dollar and euro, which the IMF calls “non-traditional reserve currencies,” are the colorful entanglements at the bottom of the chart.
The rise of “non-traditional key currencies.”
Now hold the magnifying glass over the colorful tangle in the chart above. And what we're seeing is that while these other currencies, excluding the Chinese yuan, have been increasing their share since 2015, the dollar is losing share and the euro is sticking to that share. That's it.
So it's not just one currency that's rising against the dollar. This means that many “non-traditional key currencies” are gaining market share.
“Everything else” (yellow in the image below) is a large group of currencies whose total share jumped from 2.5% at the end of 2019 to 4.2% in Q2, the biggest increase. It consists of currencies that are not separately listed in IMF data. . The renminbi was part of this group until 2016.
Diversification factors. The IMF stated in a document: 2022 Papers It is the central banks of developed and emerging countries that hold at least 5% of their foreign exchange reserves in “non-traditional reserve currencies”, including most of the G20 countries.
Chinese yuan (red) is an exception. When the IMF added the renminbi to its basket of currencies backing special drawing rights (SDRs) in 2016, the currency was seen as an upcoming threat to the US dollar's dominance as the world reserve currency. China is the world's second largest economy, so it is natural that it has a major reserve currency.
But it turns out that's not the case. The renminbi is at a disadvantage due to capital controls and convertibility issues. Central banks appear to be cautious about holding renminbi-denominated assets. And its role as a reserve currency is small and in decline. Even the Australian dollar (brown) now has a bigger share than the renminbi.
The percentages of major foreign exchange reserves for the second quarter as listed separately by IMF data are as follows:
- Japanese Yen, 5.6% (purple), the third largest reserve currency after the US dollar and the euro, despite a sharp drop in the yen's exchange rate against other major currencies.
- British pound, 4.9% (blue), fourth largest reserve currency.
- “All other currencies” combined is 4.2% (yellow).
- Canadian dollar, 2.7% (green).
- Australian dollar, 2.2% (brown).
- Chinese yuan, 2.1% (red).
- Swiss Franc, 0.2% (purple).
Gold is once again in the spotlight as a reserve asset for central banks.
Gold bullion is not a “foreign exchange reserve” – data above. It is a central bank's “reserve asset.” Therefore, it does not really apply to this discussion of foreign exchange reserves. However, they can replace foreign exchange reserves such as Treasury bills on a central bank's balance sheet. And we continue to do that.
Central banks have spent 50 years unloading their gold holdings. But over the past decade, they have been rebuilding their gold holdings.
They currently hold 1.16 billion troy ounces, roughly back to 1970s levels, according to the IMF. At today's prices, gold is worth $3.1 trillion, compared to $12.35 trillion in foreign exchange reserves (graph by IMF).
US dollar and exchange rates affect foreign exchange reserves.
All foreign exchange reserves are reported in US dollars. Holdings in currencies other than the U.S. dollar will be converted to U.S. dollars at the then-current exchange rate. Therefore, the exchange rate between the US dollar and other base currencies changes the size of the currency. Non-US dollar assets – However, it is not a US dollar asset.
Japan's US dollar-denominated asset holdings are expressed in US dollars and do not vary with the yen-US dollar exchange rate. However, euro-denominated assets held by Japan are converted into US dollars at the then-current euro-US dollar exchange rate. Therefore, Japan's euro asset holdings in US dollars will fluctuate depending on the euro-US dollar exchange rate, even if Japan's holdings do not change.
Despite major exchange rate disruptions, in the long run, the dollar index will [DXY] Not moving much. DXY tracks the exchange rate of the US dollar against a basket of six currencies: the euro, yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc. And DXY is now 100.4, back to 1998 levels.
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