Chinese Renminbi fight forward in slow micro steps.
If the US dollar loses hegemony as a global reserve currency, it would be a sea change globally, and especially for the US economy. Today we got the next installment in that saga, via the IMF's quarterly COFER data on foreign exchange reserves.
Total global foreign exchange reserves in all currencies went up 1.1% from the first quarter to $ 11.7 trillion. US dollar reserves increased only 0.7% to $ 6.79 trillion, and their share of the total global currency reserve fell to 61.63%, down from 61.86% in the previous quarter. And this has been going on for years in baby steps:
The US dollar's share of the global reserve currency declines when central banks other than the Fed proportionally reduce their assets in dollars and add assets to denominated currencies.
Compared to the mega-movements of the 1970s, the latest moves have been muted. Nevertheless, the current share of foreign exchange reserves in USD at 61.63% is the lowest since the turn of the year 2013. The bump in 2014, 2015 and 2016 has now been settled:
These US dollar reserves are US government bonds, US corporate bonds and other financial assets held by central banks other than the Fed in their foreign exchange reserves. The Fed's own holdings of government securities and mortgages are not included in "foreign exchange reserves."
However, the Fed's foreign currency holdings are included in the other currencies. Unlike some other central banks, the Fed has only one smidgen of foreign currency assets – currently worth $ 20.6 billion, compared to China's $ 3.1 trillion in foreign exchange reserves, for example.
Euro fails to deter dollars.
The euro has gradually replaced the national currencies of the EU member states, starting with five currencies, which included the Deutsche mark, an important reserve currency of its time, but well below the dollar. A huge amount of optimism was linked to the euro when it arrived. The predecessor's currency portfolio is converted into euro assets, but the central banks then stacked on additional euro assets. In the early phases, the dollar share fell from 71.5% in 2001 to 66.5% in 2002.
Today, if the 19 member states of the eurozone were one country, it would be the largest economy in the world. Combining these European currencies into one currency gave rise to hope in the early days when the end of dollar hegemony ended. The goal was for the euro to reach parity with the dollar. These hopes were brutally derailed by the sovereign debt crisis in the euro, and the euro was set at a rate of around 20% – 20.3% in the second quarter of 2019.
The Chinese renminbi is growing, but is barely registering.
Since being included in the IMF's Special Drawing Rights (SDR) currency basket – in October 2016, the Chinese renminbi has officially been a global reserve currency. But the patience of people hoping that the renminbi will quickly knock the dollar from the perch continues to be tested hard: In the second quarter, the share of renminbi marked a smidgen to a record but small share of 1.97%.
In the general scheme of things
The diagram below shows the dollar's slowly declining but still hegemonic share of foreign exchange reserves, the euro's substantially flat share and the relatively small share of the other reserve currency. Renminbi (RMB) is the short, red line near the bottom:
To shed light on the flock of currencies at the bottom of the chart above, it is useful to look at those without the US dollar and the euro that overshadow the neighborhood :
- Yen's share rose from around 3.5% in 2015 to 5.4% currently, blowing past the pound sterling (GBP).
- Renminbi's share increased from 1.07% in 2016 to 1.97% for the time being. Although still a small share of the currency of the world's second largest economy, it has almost doubled in three years, surpassing the Australian dollar and the Canadian dollar.
- The share of "other currencies" plunged in 2016, with the arrival of yuan. Before renminbi was an official reserve currency, it was already held as a reserve currency, but the IMF listed it among "other currencies." These two were split in 2016.
Not all central banks specify to the IMF how its foreign exchange reserves are "allocated" between currencies. But the revelations are growing. In 2014, only 59% of foreign exchange reserves had been "allocated" to specific currencies. By the second quarter of 2019, allocated reserves reached 94% of total reserves.
Reserve currency and trade deficit.
The United States has the largest trade deficit in the world. And it has the dominant reserve currency. So it has been the theory that, in order to have the "global reserve currency," the US must have "a large trade deficit with the rest of the world. But this" must have "is disproved by the euro, the second largest reserve currency, and the yen, the third largest reserve currency: their economies have large trade surpluses with the rest of the world.
The reverse is the case: The US dollar, which is the largest reserve currency (and the largest international financing currency), allows the US to easily finance its trade deficits. US government policies and corporate America actions that ultimately led to the large trade deficits that took off three decades ago and continue to balloon.
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