Talk of reserve currencies and the possible decline of the dollar’s supremacy has been heated over the past few months, with China and Russia leading the fighting talk. With market-watchers awaiting more mention of the debate at this week’s G8 meeting, it’s refreshing to hear some more sensible words on the issue, specifically on the idea of the euro replacing the dollar as the world’s leading reserve currency.
From RBC’s global currencies team:
Reserve diversification out of USD is decade-old phenomenon and it will take a decade or longer before another credible monetary order is established. The process is evolutionary, not revolutionary, and we can find no evidence that it is accelerating. For the foreseeable future, EUR is the only other currency that deserves serious consideration as reserve currency and it is likely to continue to be the main beneficiary. There are clear and obvious attractions to the world re-benchmarking itself to a broader range of currencies such as SDR basket and to that basket itself being broadened to include EM currencies. But there are huge hurdles to this happening in anything other than the extremely long term.
Indeed.
In fact, the financial crisis has actually done little to boost the international role of the euro according to the ECB’s latest review (H/T Alea):
This review shows that the global financial turmoil, despite having a very marked impact on overall financial market activity, has not triggered any notable shifts in the currency preferences of market participants. As a result, the international role of the euro, when measured relative to the international role of other currencies, remained fairly stable during the review period. This also applies to recent developments following the intensifi cation of the fi nancial market turmoil in September 2008. All in all, this fi nding corroborates the conclusion of earlier reviews that the international role of currencies tends to be relatively stable over time.
Except in that very space of central bank reserves, where the euro actually experienced a modest uptick:
In 2008 the share of the euro in global foreign exchange reserves increased somewhat to 26.5% as central banks of several emerging market economies defended their currency pegs mainly by selling reserve assets denominated in US dollars.
That figure is based on data released to the IMF and hence comes with a plethora of caveats, notably the fact that China is not included in the numbers. The breakdown is also susceptible to valuation swings as a result of exchange rate movements, meaning for example that if EUR/USD falls, the value of total reserves in USD terms will fall even if there’s no actual outflow from central banks. With that in mind, however, here’s the chart:
Not impressed?
Here are some more salient charts from RBC, showing the long-term trend away from USD reserve holdings:
Related links:
More dollar deliberations – FT Alphaville
SDRs, China and UK commercial real estate – FT Alphaville
Invoice: You owe us RMB – FT Alphaville
Insight: Reservations about the dollar – FT