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Apr 26, 2022
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De-dollarization of international reserves: an inexorable global trend

Over the past two decades, they have been talking about the decline of the US dollar, meaning by this a decrease in the share of the American currency in official international reserves, international settlements for foreign trade and other cross-border transactions, in assets and liabilities of banking systems, in foreign exchange transactions in the FOREX market. However, these conversations did not yet give grounds to talk about the final decline of the dollar, the loss of its status as the main currency. The events that began in February 2022 (the sanctions war) revived discussions about the future of the “green” again. Now I want to pay attention to such an indicator as the share of the US dollar in official foreign exchange reserves. They are part of official international reserves minus SDRs (special drawing rights, a special currency in a special account of an IMF member), the country’s position in the IMF, and monetary gold. At the end of 2021, the total value of official foreign exchange reserves of all IMF member countries amounted to $12.937 billion. At the turn of the 1990-2000s, the share of the US dollar in the total foreign exchange reserves of IMF member countries reached a record high of more than 70 percent. Here are data on the shares of major currencies in the total foreign exchange reserves of the IMF member countries (at the end of the year, %): 2001 2011 2021 US dollar 70.7 62.3 58.8 Euro 19.8 24.7 20.6 British pound 2.7 3.8 4.8 Japanese yen 5.2 3.6 5.6 Swiss franc 1 .2 0.1 0.2 Source: IMF As we can see, over two decades (2001-2021), the share of the US dollar decreased to 58.8%, by almost 12 percentage points. The share of the euro and the Japanese yen grew somewhat, the British pound sterling noticeably strengthened its position. The Swiss franc has lost its former positions. There was a partial replacement of the US dollar with new reserve currencies such as the Canadian dollar (its share at the end of 2021 was 2.4%) and the Australian dollar (1.8%). Also, the Chinese yuan appeared in the reserve currencies with a share of 2.8% at the end of last year (fifth place in the ranking of reserve currencies). Be that as it may, at the end of last year, despite some weakening of its positions, the dollar continued to reign in the world of reserve currencies. In total, as part of the international reserves of the IMF member countries, dollar reserves amounted to 7.087 billion dollars. It can be assumed that most of them are in China. At the end of last year, China’s foreign exchange reserves amounted to 3.250 billion dollars. This is the total value of all currencies included in the reserves. Unlike the vast majority of IMF member countries, China still does not disclose the currency composition of its reserves. It belongs to the category of secret information. However, sometimes some information slips through. Thus, in July 2019, the State Monetary Administration of China announced that at the end of 2014, US dollar assets accounted for 58% of China’s total reserves, compared with 79% in 2005 (65% in 2014). If we assume that by the end of 2021 this share was brought to half, then in absolute terms, the US currency accounted for approximately 1.600 billion dollars (approximately 23% of all dollar reserves of IMF member countries). Most of China’s dollar reserves are US Treasury bonds. As of February 2021, China’s portfolio of such securities, according to the US Treasury, was $1.054.8 billion. The rest is US currency in the accounts of foreign banks. China has been cautiously reducing the size of its US Treasury portfolio in recent years. Thus, for the period from February last year to February this year, it decreased by almost $50 billion. If a few years ago China was the main holder of US Treasury securities, now it is already in second place after Japan. Japan, Great Britain, Switzerland, Belgium, Taiwan, the Cayman Islands and others are gradually replacing the Chinese share in US Treasuries. The sanctions war of the collective West has aggravated relations between Washington and Beijing, which has refused to actively support the West in the economic war against Russia. Beijing understands that today the United States and its allies are working out methods of sanctions pressure in Russia, which will be applied to China tomorrow. And no matter how Beijing maneuvers, it will not succeed in avoiding a tough confrontation with the collective West. And Beijing cannot help but prepare its international reserves for possible US sanctions by continuing to carefully reduce its portfolio of US Treasuries. There is some reason to believe that the numbers of international foreign exchange reserves that Beijing officially publishes are somewhat overestimated. These overestimated figures mask the decline in the part of the reserves, which are represented by dollars on the deposits of foreign banks. Part of this dollar currency can be spent on buying gold on the world market. The State Monetary Administration of China has just reported that in March, the country’s foreign exchange reserves fell by $25.8 billion to $3.188 trillion. It can be assumed that this decrease occurred mainly (or even exclusively) due to the dollar component of the reserves. The foreign exchange reserves of many countries have traditionally consisted almost exclusively of US dollars. Saudi Arabia and a number of other OPEC member countries can serve as a striking example. These countries have been selling “black gold” only for US dollars for almost half a century, but they, too, are expected to be able to diversify their reserves into other currencies in the near future. Saudi Arabia has almost agreed with China that it will sell oil to the latter not only for US dollars, but also for Chinese yuan. And when that happens, Saudi Arabia’s dollar reserves will begin to dilute with Chinese currency. The sanctions war has undermined confidence not only in the US dollar, but also in the euro, the British pound, the Japanese yen, the Canadian and Australian dollars, the Swiss franc: after all, the collective West has frozen all these currencies as part of international reserves. All these currencies have become “toxic”. It can be expected that confidence in the yuan will increase, as well as demand for gold – a foreign exchange asset in international reserves, which has complete immunity to sanctions. Usually, central banks managing international reserves do not make loud statements that they are going to change the currency structure of reserves. Everything is done quietly. The exception was the Central Bank of Israel, whose foreign exchange reserves currently stand at $ 206 billion. Bloomberg, citing the vice chairman of the Central Bank of Israel, Andrew Abir, reported on April 20 that a number of new currencies have been added to the structure of Israel’s reserves, including the Chinese yuan , Japanese, Australian, Canadian currencies. Experts explain this decision of the Israeli monetary authorities by US sanctions to freeze Russia’s foreign exchange reserves. “The recent seizure of most of Russian foreign exchange assets as part of anti-Russian sanctions may prompt many countries to further restructure their reserves,” Bloomberg believes. To what extent the sanctions war against Russia affected the position of the US dollar and other leading currencies in the world’s foreign exchange reserves, we learn from the IMF statistics for the first quarter of this year. Photo: REUTERS/Ueslei Marcelino

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