It is one of the great paradoxes of the financial crisis that while the private sector scrambles for dollars, central banks are stuffed full of them. Ever since the Asian financial crisis in 1997, central banks have rapidly accumulated foreign-currency reserves, principally dollars. Today, international reserves stand at about $7 trillion, of which 70% is estimated to be in US dollars. In contrast the total market value of treasury bonds outstanding, according to JP Morgan’s government bond index, comes to a face value of $2.6 trillion.
By placing their reliance on the dollar to such a degree, central banks have contributed to the financial crisis. By hoarding US treasuries, “central banks have left the market short of liquidity, management instruments and collateral,” says Ousmene Mandeng of Ashmore Investment Management.
The irony is that this vast accumulation of dollar reserves has not proved particularly useful for the official sector either, difficult as it is for them to monetize their holdings at a time of crisis without leading to a potential crash in the treasury market.
The natural conclusion to draw is that central banks need to become less reliant on the dollar. The statements from the Russian and Chinese governments proposing that the US dollar should be replaced eventually by a global single currency, such as the IMF’s Special Drawing Right, suggest that central banks are thinking along similar lines.