lead subtle shift away from dollar
Central banks with trillions
of dollars in reserves that are already stepping up euro
and yen purchases will likely continue doing so in coming
years, driven by worries over the stability of the
A record U.S. budget gap and the rise of dynamic developing
economies like China suggest the dollar, down over 20 percent
since 2002 on a trade-weighted basis, has further to fall.
Of course, the dollar comprises some two-thirds of global
reserves and will remain dominant in most holdings, as attempts
to dump it would destroy the value of central bank
But with the speed of reserve accumulation increasing after a
crisis-induced lull late last year, policy makers can choose to
park more new cash in euros and yen without having to sell
existing dollar assets.
"I think 2009 will be remembered as a watershed moment for
currencies," said Neil Mellor, strategist at BNY Mellon, which
has some $20 trillion in assets under custody. "I don't think
there will be an imminent move, but it is quite clear there's a
plan to shift reserves to a more balanced portfolio."
Barclays Capital research showed that central banks that report
reserve breakdown put 63 percent of new cash coming into their
coffers between April and July into non-U.S. currencies.
"There's an incipient desire to reduce the dollar share of
reserves, and central banks will use any opportunity to do it,
provided it doesn't cause the dollar to fall out of bed," said
Steven Englander, chief U.S. currency strategist at
International Monetary Fund data shows the dollar's share of
known world reserves has been declining since it stood at 72
percent in 1999, the year the euro was introduced. As of the
second quarter of 2009, it accounted for 62.8 percent.
To be sure, some of that shift is driven by the dollar's
decline against a basket of currencies over that period.
But the Barclays data, which removes valuation effects, shows
the second quarter was the only one in which central banks
accumulated more than $100 billion in reserves and put less
than 40 percent into dollars, down from a 70 percent quarterly
average back to 2006.
Overall reserves rose 4.8 percent to $6.8 trillion in the
second quarter, the IMF said, the first increase in a year.
CATCHING UP TO THE DOLLAR
Policy makers acknowledge the dollar will remain a linchpin of
global finance for many years to come. But it has fallen
steadily on a trade-weighted basis over the last decade, a
troubling sign for China, Russia, India and other big U.S.
creditors holding trillions of dollars of U.S. Treasury
Worries about record deficits, run up as the United States
borrowed hundreds of billions to stimulate an economy ravaged
by financial crisis, has further diminished foreign demand for
U.S. assets, making it likely the dollar will weaken
And as others catch up to the United States, the dollar will
share the stage with other currencies, said Barry Eichengreen,
an economics professor at the University of California at
"The big beneficiary in the short run will be the euro, as only
it has the requisite liquidity," he said. "But there's no
reason why we shouldn't look forward to the advent of a
multipolar reserve currency system."
The euro's share of known reserves hit 27.5 percent in the
second quarter, from 18 percent in late 2000, IMF data showed.
Analysts say it could exceed 30 percent in coming years.
The yen and sterling also stand to gain, while currencies from
commodity exporters such as Australia may see more buying,
Mellor said, particularly by energy-hungry emerging economies
such as China, which holds $2.3 trillion in reserves.
Barclays' data showed claims in "other currencies" beyond the
big four -- dollar, euro, yen, sterling -- rose more than 10
percent between April and July.
China does not report currency composition but is widely
thought to hold around 70 percent in dollars.
Russia, the third biggest reserve holder with $419 billion in
its war chest, says it holds some 47 percent in dollars and 40
percent in euros but wants to buy more of other currencies.
Central banks are also turning to gold, which Wells Fargo
global economist Jay Bryson said may partly explain gold's
surge to record highs.
Taiwan, the fourth largest reserve holder, has said it is
considering buying more gold, while China said in April it had
increased gold holdings by 75 percent since 2003. This week,
India bought 200 tones of gold from the IMF for $6.7
DON'T COUNT DOLLAR OUT
Central banks do face limits on how they diversify their
reserve holdings. Most currencies are simply not deep enough to
accommodate massive sudden inflows and outflows.
Even a big shift from dollars to euros begs the question of
which country's debt to buy. No European government bond market
is as deep as the U.S. Treasury market, and bonds with the
highest yields are from countries with the weakest
"If you buy a 30-year Italian government bond, is Italy still
going to be in the euro zone 30 years from now?" said Bryson.
"Probably, but there is a risk there."
And while China's economy is on track to one day become the
world's biggest, the yuan won't be a viable reserve candidate
until China loosens controls and lets foreigners invest
"That is a matter of decades, not years," said Anne Krueger, a
former IMF deputy director now at Johns Hopkins University's
School of Advanced International Studies.
Edwin Truman, a senior fellow at the Peterson Institute for
International Economics and a former Federal Reserve economist,
says it's "not so much a drift away from the dollar as it is a
drift to other currencies"
"Will the dollar share of reserves be lower five years from
now?" he asked. "If I had to guess, I'd say, 'yes.' Will it be
because of a massive stampede out of dollars? Probably