The dominance of the United States dollar in foreign currency reserves is continuing to wane while the Australian dollar emerges as a dark horse.
An International Monetary Fund (IMF) report said, despite the reduced role of the greenback over the past 20 years, the remainder of the “big four” – the euro, yen and point – had not picked up an increased share of international reserves.
“Rather, it has been accompanied by a rise in the share of what we have called non-traditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies,” the report, published last week, said.
“The most recent data extends this trend.”
The role of the US dollar has been a subject of hot international debate off the back of economic fragmentation and the potential reorganisation of global economic and financial activity into separate, nonoverlapping blocs.
The IMF report said non-traditional reserve currencies (like the Australian dollar) were attractive to reserve managers because they provided diversification and relatively attractive yields.
“They have become increasingly easy to buy, sell and hold with the development of new digital financial technologies (such as automatic market-making and automated liquidity management systems),” it said.
“This recent trend is all the more striking given the (US) dollar’s strength, which indicates that private investors have moved into dollar-denominated assets.
“One non-traditional reserve currency gaining market share is the Chinese renminbi, whose gains match a quarter of the decline in the dollar’s share.
“The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalisation, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency.”
Despite these efforts and the market share growth, the renminbi internationalisation was showing recent signs of “stalling out”.
The IMF report also plotted a shift away from holding reserves in currencies towards gold, which could be warehoused in a country, free of sanctions risk.
“That work also showed that the demand for gold by central banks responded positively to global economic policy uncertainty and global geopolitical risk,” the report said.
“These factors may lie behind the further accumulation of gold by a number of emerging market central banks. Before making too much of this trend, however, it is important to recall that gold as a share of reserves still remains historically low.”
The full article is on the IMF website.
