Fundamentals–Reserve Currency

Photo Barbara took in Kenya, 1985

The IMF released its reserve report around year-end 2019. The dollar is losing ground from 66% of the world’s reserves in 2014 to 61.8% at the latest reading. So what? So nothing. This is not a piece of data that moves markets. It barely gets the attention of economists.

See the longer-term chart from Wolfstreet. “Over the long term, the recent moves in the dollar’s share are relatively small. There have been huge moves from 1977 through 1991, when the dollar’s share plunged from 85% to 46%, and then huge moves as the share rose again to 70% by 2000.” Note that when the euro arrived, the US share of reserves slipped, but only a little. Evidently confidence in the eurozone as an institution failed to deliver the goods.

Besides, other reserve currencies lost share, too. What won? See the next chart. The winners are the yen and pound, but by fractional amounts. What did not win is the Chinese renminbi, although it now has a bigger share than Canada. Considering the relative size of the two economies, this is not a slur on Canada.

Let’s not forget that countries save reserves in order to be able to buy food or weapons on short notice in an emergency. A reserve currency must be liquid above all else—immediately available. The euro is certainly very liquid but consider the totally screwed up eurozone bond market—still not an integrated entity. A country could hold reserves in cash, but getting some interest would be nice and may even be a legal requirement. And all the European bonds have a negative return. So, bottom line, don’t pay attention to any doom and gloom stories about the dollar losing its position as the world’s reserve currency. Most of us will be pushing up daisies before anyone needs to worry about it.