U.S. Dollar Refuses To Die As Top Global Reserve Currency

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Includes: CNY, CROC, CYB, DRR, ERO, EUFX, EUO, FXA, FXB, FXC, FXCH, FXE, FXF, FXY, GBB, JYN, UDN, ULE, URR, USDU, UUP, YCL, YCS
by: Wolf Richter

Central banks are leery of the newly arrived Chinese yuan.

Over the decades, there have been a number of efforts to deflate the dollar's hegemony as a global reserve currency, which it has maintained since World War II. Some of these efforts - such as the creation of the euro - have made a visible dent into the dollar's status. Other efforts have essentially passed unnoticed. Now there's a new contender: the Chinese yuan.

On December 31, the IMF released its report on the Currency Composition of Official Foreign Exchange Reserves (COFER) for Q3 2017. So how has the US dollar fared as the top world reserve currency now that the Chinese yuan has also been anointed as one, and that the euro has emerged from its debt crisis?

First things first. The IMF doesn't really disclose all that much. The COFER data for the individual countries - the level of their reserve currencies and how they allocate them - is "strictly confidential," it says. So what we get to look at is the global allocation by currency.

Total global foreign exchange reserves rose to $11.3 billion in Q3 2017, within the range of the past three years, between $10.7 trillion (Q4 2016) and $11.8 trillion (Q3, 2014). But something is happening to "allocated reserves."

Not all central banks disclose to the IMF how their foreign exchange reserves are allocated. In Q3 2017, 14.6% of the reserves hadn't been allocated. But this number is plunging. In Q3 2014, just three years ago, it was still 41.2%. This means more and more central banks report to the IMF their allocation of foreign exchange reserves, and the COFER is getting broader.

So, of the 85.4% of the officially "allocated" reserve currencies in Q3 2017:

  • US dollar had a 63.5% share, down from 64.6% in Q3 2014.
  • Euro had a 20% share, down from 22.6% in Q3 2014.
  • Yen had a 4.5% share, up from 3.6% in Q3 2014.
  • Pound Sterling had a 4.5% share, up from 3.75% in Q3 2014.
  • The Australian and Canadian dollars had a share of 1.8% and 2.0% respectively.
  • The Chinese yuan - that thin red sliver in the chart below - had a share of 1.1%, up from 1.08% in the prior three quarters, and up from zero before then.
  • The Swiss franc, the hair-fine black line in the chart below, has a share of 0.2%.
  • And a number of "other" currencies have a combined share of 2.4%.

The Chinese yuan made its entry after IMF boss Christine Lagarde and the IMF staff declared in mid-November 2015 that they were gung-ho about adding it to the IMF's currency basket, the Special Drawing Rights (SDR), which is an important step toward becoming a major global reserve currency. At the end of November 2015, it was approved by the board. And it took effect in October 2016.

Sure enough, in Q4 2016, the Chinese yuan started showing up in the COFER data as a global reserve currency with a share of 1.08%. But rather than soaring, it didn't move at all over the first two quarters in 2017. And in Q3, it ticked up to a still minuscule 1.1%. Central banks do not appear to be overeager to hold this currency in large amounts.

The chart below shows the changes since Q3 2014. The black line at the top is the US dollar - its hegemony unbroken. The euro (blue line) has remained fairly stable around 20%. The dollar and euro combined account for 83.5% of the allocated foreign exchange reserves. That doesn't leave much room for other currencies. As a memo entry (not part of the percentages): the descending purple line denotes the shrinking unallocated reserves.

Note the Chinese yuan, the bright red line scraping along the very bottom since Q4 2016, just above the Swiss franc:

And how has the dollar's hegemony fared over the past decades? The chart below shows the dollar's share of allocated global official reserves going back to 1965. The low point in that time frame was in 1991 with a share of 46%. The euro made a visible dent starting in 2001. On the other hand, the Financial Crisis had no impact:

While the euro has become a major force, it has replaced the Deutsche mark and other European currencies, and so the net impact on the dollar's hegemony wasn't huge. The Chinese yuan, which some folks thought would pull the rug out from under the dollar, is barely visible in the mix. And folks eagerly waiting for the "death of the dollar," the "end of the dollar hegemony," and similar mayhem will need to be patient.

During prior incidents of an "inverted" yield curve, the Fed had no tools to get the market to push up long-term yields. Today it has one: the QE unwind. Read... "The Dreaded "Flattening Yield Curve" Meets QE Unwind."