Canada reports its international reserves on a weekly basis and today it reported the figures for the week ending Dec. 31. The US absorbs a little more than 80% of Canada's exports. While this would seem to offer a prima facia case for not diversifying reserves, Canada has long diversified its reserves.
Canada's reserve assets include dollar, euro, yen, gold, SDRs and its IMF reserve position. Taking these all into account, about 44% of Canada's reserves were in US dollars at the end of 2009 and, as of the end of June, the dollar accounted for about 52% of Canada's reserves.
Did Canada dump dollars in H2 09? Even though some observers will jump to that conclusion, the fact of the matter is that Canada actually held about $651 million more at the end of the year than it did at midyear. The euro holdings rose in value by $191 million. However, over the course of H2 the euro appreciated by about 2% against the US dollar and, given Canada's euro holdings, a 2% increase in dollar terms is worth about $370 million. The fact that the value of Canada's euro holdings did not rise by as much would suggest that either Canada used a different valuation adjustment or it may have sold euros. That latter seems unlikely, especially given that Canada is rising 2 billion euros via a 10-year bond offering (reportedly priced at 2 bp above benchmark mid-swap rates).
A better explanation for the dollar's decline as a share of Canadian reserves would focus on the fact there was a large SDR allotment Q3 09 that boosted overall reserves. If one were to only to look at Canada's currency reserves, the dollar's share edged marginally higher in H2 09 to 56% from 55.6%.
Nevertheless, the overall point remains valid. Canada has diversified its reserves away from dollars and its overall reserves are valued at $54.35 billion. This is rather typical, in the sense that, with the notable exception of Japan, industrialized countries generally carry lower levels of reserves than developing countries.
Reserves are highly concentrated in about 10 countries. These 10 countries account for $5.45 trillion in currency reserves, while world reserves are around $7.7 trillion (~70%). The idea that countries are trapped with the dollar, i.e., that there is no alternative, is simply not true for ll but 10 countries.
Disclosure: No positions