At the end of June 2011, the IMF released their update on the currency composition of official foreign exchange reserves held at 138 central banks in both developed and emerging economies. The total value of the world’s official foreign exchange reserves amounted to a massive $9.694 trillion at the end of Q1 2011, which is a record level and $1.4 trillion above the level that prevailed a year-ago.
China’s share of those reserves is now in excess of 30%, and rising. Amazingly, in the year 2000, China’s share was less than 10%.
South Africa’s gross foreign exchange reserves currently amount to around $50 billion, which is equivalent to approximately 0.5% of the world’s official reserves.
The data used in this analysis comprises information from 33 advanced economies and 105 emerging markets. Naturally, foreign exchange reserves do not include holdings of a currency by the issuing country. For instance the US Dollar assets of the Federal Reserve and the Euro Assets of the ECB are not foreign exchange reserves.
Additionally, not all countries report the currency compensation of their reserves (most notably China). As a result, a portion of this analysis is based on only those developed and emerging markets that provide a breakdown of their reserves by currency. (Official Foreign Exchange Reserves are reserves held by the central bank of a country. This excludes reserves held within the private banking system).
Most of the world’s official reserves are, understandably, in the hands of emerging economies (67.4% of total, or $6.53 trillion, at the end of Q1 2011). The remarkable thing is the growth in these reserves. Since the beginning of 2000, the official reserves of emerging economies have grown by a total of $5.87 trillion or 890%. This has been driven by a massive increase in investment and trade flows with emerging economies over the past 10 years; especially with China. Emerging economies now comprise over 30% of world GDP, well up from less than 20% as recently as 1999, (see chart attached).
The currency composition of the world’s official reserves has also changed meaningfully over the past number of years, with the US Dollar losing its absolute dominance as the Reserve Currency of the world and the Euro gaining some ground. In 1999/2000, the Dollar represented more than 70% of the world’s reserves, in Q1 2011 it was down at 60.7%, the lowest level since the data started. In contrast, during 1999/2000 the Euro comprised between 17% and 18% of world reserves. It has since risen to between 26% and 27%.
A significant component of this shift away from the Dollar occurred after 9/11, and was probably aggravated by the ensuing slump in the US economy. It was also around that time that emerging markets started to out-perform more noticeably. The move away from the Dollar continued through the credit crisis, becoming more pronounced amongst emerging markets. Intriguingly, while the initial shift away from the Dollar favoured the Euro, in the past couple of years emerging markets have increased their holdings of a much broader range of currencies, including other emerging market currencies.
In summary, the Dollar is systematically losing its absolute dominance as the Reserve Currency of the world. This is partly due to the US’s loss of importance in the global economy (the US economy has slid from a peak of 32.2% of world GDP in 2001 to 23.7% currently), but also due to a broader recognition of the structural impediments facing the US economy. However, one cannot assume that this loss of dominance by the US Dollar will continue on a perpetual basis. This is partly because the Dollar continues to play an overriding role in commercial activity around the world, but also because there is still no clear and obvious successor to the Dollar.
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