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Are central banks worried about the intoxication of the Fed’s money printing and the massive US government debt? But still wary of the Chinese renminbi.
By Wolf Richter for WOLF STREET.
The global share of US dollar-denominated foreign exchange reserves fell to 59.0% in the fourth quarter, according to IMF COFER data released today. This corresponded to the 25-year low of 1995. These foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, US commercial mortgage-backed securities, and so on. held by foreign central banks.
Since 2014, the dollar’s share has fallen a full 7 percentage points, from 66% to 59%, on average 1 percentage point per year. At this rate, the dollar’s share would fall below 50% over the next decade:
Global foreign exchange reserves are not included in the Fed’s own holdings of dollar-denominated assets, its $ 4.9 trillion in treasury securities, and $ 2.2 trillion in mortgage-backed securities, which it has raised as part of its QE.
The status of the US dollar as the dominant world reserve currency is a crucial catalyst for the US government to continue to inflate its public debt, and for Corporate America’s relentless efforts to create the vast trade deficits by offshoring production to countries cheap, mainly China and Mexico. They all rely on the willingness of other central banks to hold large amounts of dollar-denominated debt.
But it looks like central banks have gotten a little nervous and want to diversify their holdings – but still so slowly, and not all of a sudden, given the scale of this thing, which, if mismanaged, could blow the world away. everyone’s house. cards.
20 years of decline.
Two decades ago, when the dollar held a share of around 70% of reserve currencies, an alleged competitor became a daily reality: the euro, which combined the currencies of member states into one currency, thus combining their reserve weight. motto. Since then, the dollar’s share has fallen by 11 percentage points.
By contrast, between 1977 and 1991, the dollar’s share had fallen by 46 percentage points – with huge drops in 1979 and 1980 probably linked to US inflation threatening to spiral out of control, reaching nearly 15% in 1980. in 1991, with more or less controlled inflation. And the dollar’s share then jumped 25 percentage points until 2000:
Other reserve currencies.
The euro’s share has since been between 19.5% and 20.6%, but in the fourth quarter it broke the range and rose to 21.4%, the highest in the data. The ECB’s holdings of euro-denominated assets that it acquired as part of its QE are not included in euro-denominated foreign exchange reserves.
The rest of the reserve currencies are also rans – the spaghetti at the bottom in the chart below. This includes the Chinese renminbi, the bold red line at the bottom:
Renminbi threatens dollar hegemony? Not yet.
The renminbi’s share is still only 2.25%, despite the scale and global influence of China’s economy, and despite the hype when the IMF elevated the renminbi to the official world reserve currency. in October 2016 by including it in the basket of currencies that support the Special Drawing Rights (SDR).
But the renminbi’s share has continued to climb so slowly. At the rate it has accelerated over the past two years (+0.36 percentage point in two years), it would take another 50 years or so for the renminbi to reach a 25% share.
Obviously, other central banks are still suspicious of the renminbi and its implications, and are not keen to empty their dollars all at once in exchange for the renminbi; it’s easy.
Also-rans under the microscope: Rise of the yen.
To see what’s going on with the spaghetti at the bottom of the table above, I enlarged the scale and narrowed it down to the 0% to 6% range. This removes the dollar and the euro and allows for a detailed overview of the other reserve currencies.
What stands out is the surge in the yen, the third largest reserve currency. This includes a gain of 2.0 percentage points from the fourth quarter of 2016, which wiped out the 1.15 percentage point gain over the same period by the renminbi. As for the yen, the renminbi is losing ground.
Despite Brexit and all the frightening hype surrounding it, the Pound Sterling (GBP), the fourth reserve currency, has not shed any share.
The euro area has recorded a significant trade surplus – between 200 and 275 billion euros per year in recent years – with the rest of the world after emerging from the euro debt crisis in 2012. On the US side, the US trade deficit in goods with the euro area amounted to $ 183 billion in 2020.
The euro area trade surplus shows that it is easily possible for an economic area with a large trade surplus to also have one of the major reserve currencies. A large reserve currency need not be associated with a large trade deficit. But having the dominant reserve currency helps the United States finance its trade deficits and inflate public debts.
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