The presence of the U.S. dollar in foreign exchange reserves held by governments and central banks is declining. The share of dollar-denominated assets in the world’s overall foreign exchange reserves fell to 59% by the end of 2020, the fifth consecutive year of decline and the lowest level in 25 years. Emerging market countries such as China and Russia have reduced their holdings of U.S. Treasuries and are increasing their holdings of gold and other currency-denominated assets. Emerging market countries are beginning to diversify their investments due to concerns about the declining value of the U.S. dollar caused by, among other things, inflated U.S. government debt.
Foreign exchange reserves are foreign currency-denominated assets held by governments and central banks for exchange rate intervention in case of market disruptions and to repay foreign currency debt in case of financial crises. For foreign exchange reserves, there are many cases of holding them in the form of treasury bonds of major countries with high credit rating and liquidity versus gold, etc.
The International Monetary Fund (IMF) counted foreign exchange reserves of 149 countries and territories, with a balance of $12.7 trillion as of the end of 2020. Of this, dollar-denominated assets stood at $7 trillion, up 4 percent from the previous year. According to Daisuke Don Kamal of Mizuho Bank, “One reason is that emerging market countries have implemented foreign exchange interventions to buy dollars and sell their own currencies in order to avoid appreciation of their own currencies that are detrimental to exports.” Another reason is that the U.S. government implemented a huge fiscal stimulus in response to the new crown epidemic, increasing the issuance of U.S. Treasury bonds, which other countries bought a portion of.
Looking at the comparable balance of foreign exchange reserves by various currencies ($11.8 trillion), the share of the dollar stood at 59% at the end of 2020, down 1.7 percentage points from a year earlier and below 60% for the first time since 1995. The share of the U.S. dollar had exceeded 70% by the end of 2001, but then showed a decline. 2020’s depreciation of the dollar led to a decline in the share of dollar-denominated assets, but IMF analysis says that in the longer term, “central banks are gradually shifting foreign exchange reserves away from the dollar (to other assets).”
Statistics from the U.S. Treasury show that China’s holdings of U.S. Treasuries stood at about $1.07 trillion at the end of 2020. “China’s holdings of U.S. Treasuries are considered to be mostly investment funds for foreign exchange reserves,” said Hirotta Hirayama of SMBC Nikko Securities. There is also a view in the market that China’s selling of U.S. Treasuries is coming to an end as U.S. President Donald Trump becomes Biden.
Russia’s holdings of U.S. Treasuries are also plummeting. Statistics from the Central Bank of Russia show that Russia’s foreign exchange reserves (as of September 2020) total $578.7 billion, including gold. The ratio of the U.S. dollar to these is about 20%, a sharp decline from about 50% in 2017. Russia’s foreign exchange reserves are rapidly moving away from the U.S. dollar in the context of the economic sanctions imposed on Russia by the U.S. over Ukraine. Countries such as Turkey and Brazil have also reduced their holdings of U.S. Treasuries in recent years.
The ratio of currencies other than the U.S. dollar in countries’ foreign exchange reserves is increasing. The euro stood at 21% as of the end of 2020, raising it to the same level as six years ago. It is believed that the value of the euro as a reserve currency has increased as the EU has issued common bonds as a source of finance in response to the recovery fund launched in response to the epidemic. The ratio of the Japanese yen has also re-increased in 20 years to about 6 percent. 2020 net purchases of Japanese medium- and long-term debt by Chinese investors reached 2.2 trillion yen, potentially changing a portion of foreign exchange reserves from the dollar to the yen.
The ratio of the yuan to countries’ foreign exchange reserves is also increasing and now exceeds 2 percent. Russia, for example, is rapidly increasing the ratio of the yuan in its foreign exchange reserves. In June 2017 it was only 0.1%, reaching 12.3% by September 2020.
The currencies of the countries (REUTERS)
One of the new investment objects of foreign exchange reserves is gold. According to the World Gold Council (WGC), central banks have maintained a net purchase of gold over the past 10 years. Gold has a “stateless currency” that is not influenced by the credit of the country, and has received increased attention.
In Russia, the share of gold in foreign exchange reserves exceeded that of the U.S. dollar in 2020, and in March 2021, the Hungarian central bank increased its reserve assets to 94.5 tons of gold, three times the previous level. “Concerns about government debt and inflation are rising rapidly and the importance of gold as a safe asset has further increased,” the Hungarian central bank said.
The U.S. “twin deficits” of current account and fiscal balances increased further in response to the new crown epidemic. The trend of foreign exchange reserves away from the U.S. dollar also reflects, to some extent, the value of the dollar is declining.
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