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Is the dominance of the dollar affected by the decline in its share of international reserves?

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Is the dominance of the dollar affected by the decline in its share of international reserves?

Is the dominance of the dollar affected by the decline in its share of international reserves?

 05 Oct 2019 04:23 PM
From: Sally Ismail

Mubasher: The US dollar's share of international reserves has returned to decline after a brief recovery, but is the green paper affected by the fact that it still enjoys the lion's share?

Recent data from the International Monetary Fund (IMF) show a continuing trend of a declining US dollar share of international reserves versus an increase in the share of other currencies such as the Japanese yen, the euro and the Chinese yuan.

The dollar had its share in total international reserves for three consecutive quarters at the end of the fourth quarter of last year, before turning to the rise in the first three months of 2019, but fell again in the second quarter.

However, the share of the green paper in international reserves still exceeds 61 percent at the end of the second quarter of this year, while the remaining seven currencies make up less than 39 percent of the total reserves.

 

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Share of currencies in international reserves since 2016 - (Source: IMF)

Total international reserves rose to $ 11.02 trillion by the end of June, compared with $ 10.9 trillion in the first three months of 2019.

International reserves are assets of central banks held in different currencies for use primarily to support any contingent liabilities and can sometimes be used to help support their currencies.

The situation in the second quarter

The share of currencies of Japan's Kalin, Euro and Chinese Yuan saw an increase in international reserves during the second quarter at the expense of the decline in the US dollar.

Reserves in the US currency stood at $ 6.79 trillion at the end of the second quarter of this year, up 0.7 percent from $ 6.74 trillion recorded in the first three months of 2019.

But the dollar's share of total reserves fell to 61.63 percent from 61.86 percent in the first quarter.

The dollar's share of these international reserves is the lowest since the fourth quarter of 2013, when it was 61.27 percent.

In contrast, the Japanese yen's share of international reserve allocations rose to 5.41 percent in the second quarter of 2019, the largest share since the first quarter of 2001.

The share of reserves held in yuan, also known as the renminbi, rose to 1.97 percent, the highest since the currency joined the IMF's global reserve currencies in October 2016.

Eurozone reserves, second only to the dollar, stood at 20.35 percent in the three months to June.

Tempus trader Juan Perez, in Washington, sees the yen's status as a safe-haven currency making it more attractive with all the panic or the prospect of a decline in economic activity.

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Share of currencies in international reserves during the second quarter - (Source: IMF)

The new trend

Although the green paper remains the world's most dominant currency in international reserves, central banks around the world appear to be seeking to diversify their reserves away from the dollar.

The decline in the dollar's share as an international reserve currency occurs when central banks other than the Fed reduce their dollar-denominated assets and add assets denominated in other currencies.

This decline cannot be considered significant when compared to the situation at the end of the twentieth century, where the dollar's share fell to 46 percent in 1991.

 

The dollar's share of international reserves since 1956 (Source: Wolf Street)

Highlighting international reserve currencies below the dollar and the euro, the Japanese yen's share has risen from around 3.5 percent in 2015 to 5.4 percent today.

The Chinese yuan's share rose from 1.07 percent in 2016 to 1.97 percent, although it remains a small share for the currency of the world's second largest economy but has managed to increase its share within three years to surpass the Australian and Canadian dollars.

 

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Share of international reserve currencies without dollar and euro - (Source: Wolf Street)

Why does the dollar's dominance decline?

The United States has the world's largest trade deficit but still has the dominant reserve currency.

This situation explains the theory that in order for a country to have a global reserve currency, it must have a large trade deficit with the rest of the world.

But this theory is refuted when looking at the euro, the second largest reserve currency, and the yen, the third largest reserve currency, where their economies enjoy a large trade surplus with the rest of the world.

At the same time, Russian President Vladimir Putin believes that the world's confidence in the green paper is declining and is moving to acquire gold instead.

Putin attributed this to Washington's use of the dollar as a political performance has become counterproductive.

Moreover, countries led by China are slashing their holdings of US Treasuries with the fact that Beijing is the largest holder of US debt.

Russia has also been following the same approach since last year , with its holdings declining sharply for political and economic reasons.

But all of the above does not prevent the fact the mother of the dollar remains the world's first reserve currency.

According to a study by the Brookings Institution, the dollar's share of international reserves has fallen by only 2 percent since 2007, while the euro's share has fallen by about 6 percent.

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