CURRENCY

Global share of US dollar reserves drop to a 25- year low - IMF

Some analysts say this partly reflects the declining role of the currency that still controls global trade

In Summary
  • According to the report, the share of US dollar assets in central bank reserves dropped by 12 percentage points—from 71 to 59 per cent
  • A few countries, such as Russia, have already announced their intentions to ditch the US dollar
A trader changes dollars for naira at a currency exchange store in Lagos, Nigeria, February 12, 2015. /REUTERS
A trader changes dollars for naira at a currency exchange store in Lagos, Nigeria, February 12, 2015. /REUTERS

The share of US dollar reserves held by central banks fell to 59 per cent—its lowest level in 25 years—during the fourth quarter of 2020, a survey by IMF shows. 

Some analysts say this partly reflects the declining role of the US dollar in the global economy, in the face of competition from other currencies used by central banks for international transactions.

''If the shifts in central bank reserves are large enough, they can affect currency and bond markets,'' says IMF. 

According to the report, the share of US dollar assets in central bank reserves dropped by 12 percentage points—from 71 to 59 per cent—since the euro was launched in 1999 (top panel), although with notable fluctuations.

Meanwhile, the share of the Euro has fluctuated around 20 per cent, while the share of other currencies including the Australian dollar, Canadian dollar, and Chinese renminbi climbed to nine per cent during the period under review. 

Exchange rate fluctuations can have a major impact on the currency composition of central bank reserve portfolios. Changes in the relative values of different government securities can also have an impact, although this effect would tend to be smaller since major currency bond yields usually move together.

During periods of US dollar weakness against major currencies, its  share of global reserves generally declines since its value of reserves denominated in other currencies increases

IMF said the drop can be influenced by several factors, including diverging economic paths between the United States and other economies, differences in monetary and fiscal policies, as well as foreign exchange sales and purchases by central banks.

 Although the value of the US dollar against major currencies has remained broadly unchanged over the past two decades, there have been significant fluctuations in the interim, which can explain about 80 per cent of the short-term (quarterly) variance in its share of global reserves since 1999.

The remaining 20 per cent of the short-term variance can be explained mainly by active buying and selling decisions of central banks to support their own currencies.

The Covid-19 crisis which hit the world at the beginning of last year has also been cited as a major contributor to the diminishing value of the US dollar as most countries retreated to local trade. 

In Kenya for instance, main forex earners including tourism, diaspora remittances and earnings from agricultural exports dropped, shrinking CBK's reserves mostly held in US dollars.

The biggest drop was witnessed at the tail end of the first quarter after the country's reserves which hit a high of $9.42 billion or 5.8 months of import cover in July last year shrunk by a massive Sh27 billion to $7.359 billion (Sh807.28 billion) on  March 4.

This heavily impacted the stability of the local currency and affected the cost of living as dollar starved traders passed the high import bill to consumers. 

The US dollar is just one of the world's 185 currencies according to the International Standards Organization, but most of these currencies are only used inside their own countries.

In 2018, ISO data showed that around 90 per cent of forex trading involves the U.S. dollar.

Experts expect that the US dollar’s share of global reserves will continue to fall as an emerging market and developing economy central banks seek further diversification of the currency composition of their reserves.

A few countries, such as Russia, have already announced their intention to do so.