The US dollar loses its reserve currency shine

release time:2021/5/17

According to an article published on the website of Japan's Nikkei Asian Review on May 8, the US dollar has lost its shine as a reserve currency for emerging economies. The authors are Saito Yuta, Nan Jian Jo and Hamami Misuo. The full text is edited as follows:

The share of the world's foreign exchange reserves denominated in dollars fell for the fifth year in a row in 2020 to 59 per cent, the lowest level in 25 years, as emerging economies diversified their reserves amid fears about the dollar's prospects.

As a trusted liquid asset, US government bonds have long been the preferred source of foreign exchange reserves for governments and central banks.

But statistics from the International Monetary Fund suggest that the dollar may be starting to lose its appeal as a reserve currency. As the disease exacerbated the so-called twin deficits of the United States, putting the long-term value of the dollar in doubt, authorities around the world began to expand the share of their reserve assets in other currencies as well as non-monetary options such as gold.

According to the IMF's statistics of 149 countries and regions, global foreign exchange reserves totaled $12.7 trillion at the end of 2020. Of that, dollar-denominated assets rose 4 per cent to $7tn.

"In part, this is because emerging economies are intervening in the market by selling their own currencies and buying dollars to prevent their currencies from appreciating and putting pressure on exports," said Daisuke Tang, chief market economist at Mizuho Bank in Japan. The United States has also increased its issuance of government bonds to finance a massive stimulus response to COVID-19.

But dollar-denominated assets as a share of allocated reserves fell 1.7 percentage points to 59 per cent at the end of 2020. The last time it fell below 60% was in 1995. At the end of 2001, dollar assets accounted for more than 70 per cent of global reserves, but since then they have been on a downward trend.

The decline in the dollar in 2020 was also a factor in the decline in the dollar share last year. Still, two IMF economists, Selkan Alsranarp and Kima Simpson Bell, said in an IMF blog: "The fact that the dollar's share of global reserves is declining while its value is essentially unchanged over the longer term suggests that central banks are effectively moving away from the greenback."

Russia's holdings of US debt are falling sharply. According to statistics released by the Central Bank of Russia, Russia's total international reserves, including gold, stood at $578.7 billion as of September last year, of which dollar-denominated assets accounted for about 20 percent, compared with about 50 percent in 2017. Turkey and Brazil have also dumped U.S. government debt in recent years.

Countries are moving into non-dollar assets. According to the IMF, euro-denominated assets accounted for 21 per cent of the world's allocated foreign exchange reserves at the end of 2020, back to the level of six years earlier. Some market watchers believe the euro's popularity has risen after the European Union issued a common bond on behalf of all member states to fund the COVID-19 response, with the share of yen assets rising above 6 per cent for the first time in 20 years. The appeal of the renminbi is also growing.

Gold is also gaining popularity. The WGC says central banks have been net buyers of gold over the past decade. Last year, gold accounted for more of Russia's international reserves than the dollar. Hungary's central bank also tripled its gold holdings to 94.5 tonnes in March. "Surges in global government debt or concerns about inflation further reinforce the importance of gold as a safe haven asset in national strategies," it said.

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