The IMF’s Currency composition of official foreign exchange reserves (Cofer) report for the first quarter of 2010 was released on Wednesday. It contained a surprise for those who believed that there had been rotation out of the troubled EUR into USD: the dollar’s share of global currency reserves in fact fell from 62.17% to 61.54%.
The data does not take into account changes in exchange rates – the DXY index was up more than 4% over the first quarter – so the decline in dollar reserves is actually larger than the headline figure. As Steven Englander at Citi writes: “Given that the USD appreciated in the first quarter, the fact that the USD share of reserves declined implies some active diversification by reserve managers out of USD. Conversely, the fact that the EUR share of reserves was roughly steady [falling to 27.19% from 27.30%] despite EUR depreciation suggests that reserve managers were not actively engaged in a shift out of EUR and in fact bought the currency. Accounting for the change in exchange rate, a very rough estimate is that reserves managers bought around $75 billion of EUR.”
The Swiss National Bank was assumed to have been protecting 1.4650 in EUR/CHF during February and March, so a chunk of the EUR buying might be down to that. Global reserves denominated in CHF are stable at a tiny $5.3 billion in value. Gold reserves are not of course included in the Cofer data; it would be interesting to see if there was any depletion in the SNB’s gold reserves (XAU was €765/oz at the start of the year, €823/oz at the end of Q1 and currently stands at a little over €1,000/oz – it would almost make Gordon Brown look good wouldn’t it?).
The GBP share of reserves remained constant at around 4.3% – given sterling’s depreciation, that would represent “a bit less than $20 billion in active GBP buying,” according to Englander.
Also on Wednesday the United Nations released its World economic and social survey 2010.
The most newsworthy part of the report was the hackneyed promotion of Special Drawing Rights (SDRs) as a replacement for the USD as a reserve currency: “The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” the report says. “A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency”, and that this “must not be based on a single currency or even multiple national currencies but instead, should permit the emission of international liquidity – such as SDRs – to create a more stable global financial system.”
The report makes the usual – and true – argument that there is a problem “in the reserve and payments system, whereby reserve-creating countries are able to run payments deficits as long as other countries find it in their interest to keep building up their international reserves. If this trap is not eliminated, all financial regulatory reform will come to nought, because the mechanism facilitates an almost unlimited supply of credit from reserve-accumulating countries, resulting in increased global liquidity, which in turn has to be intermediated by the financial industry. What is required is a reserve and payments system that does not rely on national deficits to provide reserve assets.”
The report declares that further evolution in the direction of a multi-currency system “might revive the instabilities seen in the 1930s and exacerbate the instabilities already in play among the major currencies. A feasible evolutionary path towards a more stable system is one along which there is an increased use of SDRs, within a system of nationally supplied reserve assets, dominated by the dollar.”
Maybe I’m missing something (as usual), but this appears to be a load of academic waffle. Regardless of proposed increases in “emission of international liquidity” denominated in SDRs, it is difficult to see the benefit of holding a fixed (since end-2005) basket of currencies (USD 44%, EUR, 34%, JPY 11%, GBP 11%) rather than maintaining the flexibility of holding reserves in weightings of one’s own choice.
A couple of days earlier IMF head Dominique Strauss-Kahn had hit the airwaves, once again arguing that as China’s economy grows, it would make sense for SDR’s composition to include the yuan; but he thought “it will be difficult to include the renminbi before the renminbi really has a market price and is in one way or the other a floating currency. But the sooner, the better because as time goes by there are more and more reasons to include other currencies in the SDR basket – starting with the renminbi.”
When the yuan floats, it will be available to be a reserve currency in its own right – the SDR as a reserve currency will make no more sense then than it does now.
