Thursday, October 1, 2009

Dollar Share of Global Reserves Drops

According to the International Monetary Fund, the U.S. dollar's share in global currency reserves slipped in the second quarter of 2009 while the euro's share of overall reserves rose. In percentage terms, the dollar slid from 65% to 62.8% while the euro increased from 25.9% to 27.5%.

Announced during the IMF and World Bank Annual Meeting and coming shortly after the 10th anniversary of the euro, the data confirms a trend that began in 2001. Undoubtedly, the dollar is under pressure and global central banks have begun a subtle reallocation process that decreases their overall exposure to dollar risk. So far, only the government of Iran has mandated that in the future, all of its reserves be held in non-dollar-denominated assets. Although other countries may not mandate a zero-dollar reserve policy, I do expect central banks to establish strict limits on their overall dollar ratios in the future.

The IMF data covers approximately two-thirds of the world's foreign exchange reserves. This story was also reported by Reuters and Bloomberg.

For further reading:
"The Future of Reserve Currencies", Benjamin J. Cohen, September 2009
"The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency", Menzie Chinn and Jeffrey Frankel, February 13, 2008


  1. Jon,

    Once again, excellent summary of information. I have a couple of questions, and perhaps I can illicit some comments from you.

    It seems that U.S. Dollar holdings dipped to the high 50% mark in the early to mid 90's. This can most likely be attributed to the recession of 90/91. GDP growth remained sluggish until '92, if memory serves. So, where do you see the "bottom" for US Dollar holdings in percentage terms? Or, do you see a "bottom" this go 'round?!?!? Are we going the way of the British Pound Sterling? Has our debt lead us to walk the monetary plank?

  2. Patrick, thanks for the comment. Economists and media reporters frequently state, "no other choices exist besides the US dollar, so where will central banks go?" While it is true that a reserve currency must be free of exchange restrictions and be fully convertible into other freely-traded currencies, there are many scenarios for a new reserve currency besides a trade-weighted basket, the euro, or the yuan. According to the Triffin Paradox, a country issuing a 'reserve currency' must also be prepared to run a current account deficit and the US dollar has readily stepped up to the challenge. Other central banks have been unwilling to do this. Chronic current account deficits and fiscal mismanagement will only get a country so far and soon the exportation of domestic inflation will be recognized.

    Currency reserves, as expressed by the IMF, include ONLY foreign currencies, not gold. The US dollar may end up below the 50% level for currency reserves, but remember that is only against other currencies - it is only a numeraire. The important expression is against gold as the monetary standard which will gain as a percentage of overall central bank reserves.

    I foresee a viable competitor to reserve currency status deploying a strategy that gets products priced in the new numeraire and simultaneously expands the 'pie' of worldwide trading volume.

    Yes, this means encroaching into the dollar's role in the underground economy and trade pricing. Since a reserve currency is somewhat based on overall trade volume, the anonymous currency of the Internet economy will prevail. A new digital currency issued by a country with significant gold reserves would be able to accomplish just that.