Commodity Analysis

Is US dollar's status as top global reserve currency being challenged?

Rajalakshmi Nirmal | Updated on August 09, 2020 Published on August 09, 2020

The dominance of greenback continues,but rival currencies — euro, yen, pound, renminbi — are giving it a run for its money

Reports are floating in the market that it is the loss of confidence in the US dollar that is prompting investors to queue up for to gold. The US dollar index that measures the value of the greenback against its peers has dropped from 103 in March to 93 now, a 10 per cent fall.

That many countries, besides Russia and China, are reducing their exposure to US dollar-denominated assets by decreasing their holdings of US treasuries and increasing non-dollar commodity trade and investments in gold is the widely circulated speculation.

To confirm the veracity of the ‘de-dollarisation’ trend across the globe, BusinessLine crunched IMF (International Monetary Fund) numbers on the share of the US dollar in global central bank reserves.

As of June, of the global foreign exchange reserves of $11.7 trillion, almost $6.7 trillion is in US dollar and $2.1 trillion is in euro.

The portion left was divided among different currencies, including renminbi, pound sterling, yen, and Australian and Canadian dollar. The US dollar is far from losing its position as the world’s top reserve currency.

 

Dollar dominance

Looking at IMF's quarterly COFER (Currency Composition of Official Foreign Exchange Reserves) data since 1995, we understand that it is not easy to break the hegemony of the US dollar. The share of the US dollar in global currency reserves in the form of treasury securities and US corporate bonds, which was around 58 per cent in 1995, increased to 72 per cent in 1999.

Even as the euro started gaining prominence in the 2000s, the US dollar held its top position. The share of the erstwhile European currencies — Deutsche mark, French franc and others — was taken over by the euro. Holdings denominated in the euro increased to 18-19 per cent by 2001, but even then, the share of holdings in the US dollar was at about 72 per cent.

However, a recent set of data point to a worrying trend for holders of the US dollar — denominated assets.

The US dollar’s share in global reserves declined sharply between 2001 and 2011 — from 72 per cent to 60.8 per cent.

In the years that followed, the greenback’s share stabilised, but it was not long before it started to decline again. From 2015, the US dollar’s share in global central bank reserves has been falling consistently. In June 2020, it was reported at 61.99 per cent.

This shows only that central banks have been continuously reducing their holdings in the US dollar and adding assets denominated in other foreign currencies. The share of the Chinese renminbi, which the IMF included in the currency basket of the Special Drawing Rights and made a global reserve currency in October 2016, is at 1.8-2 per cent. Interestingly this is more than the share of the Australian dollar (1.55 per cent), the Canadian dollar (1.78 per cent) and the Swiss franc (0.15).

Another currency that has been a favourite of investors is the yen.

The yen’s share in global reserves has increased from 3.5 per cent in 2015 to 5.7 per cent now.

The other worry for investors is that the US dollar is losing its share in global trade, too. According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in May, the share of US dollars in the international payment market was 40.88 per cent, a drop from 44.1 per cent in March.

Central banks add gold

Since 2015, from when central banks have been reducing their exposure to the US dollar-denominated assets, the holding of the latter in gold has risen.

Data from the World Gold Council shows that gold as a percentage of total reserves of central banks across the world has increased from 9.1 per cent in 2015 to 13 per cent in March 2020.

The sharpest increases has been in Russia — from 13.1 per cent to 21.1 per cent — Turkey, the Netherlands, Mongolia, Kazakhstan, Ecuador and Venezuela.

If the ‘de-dollarisation’ trend continues, the rally in gold will not stop in a hurry.

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Published on August 09, 2020
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