The USD share of reserves increased to 65% in the third quarter from 63% in the previous quarter, largely driven by valuation effects as a result of a weaker EURUSD and intervention from the Bank of Japan. Faith in the euro seems in decline, with reserve managers reducing their exposure in the third quarter, a reversal of the first two-quarters, and there appears to be little evidence of portfolio rebalancing to counter the valuation effect, note analysts.
“Simply put, the dollar’s share of global reserves has remained remarkably steady over the last several years,” says Marc Chandler, a currency strategist at Brown Brothers Harriman. “If anything, the eurozone crisis has served as a reminder that there has not yet been established any currency that could knock the dollar off of its perch as the world’s reserve currency.”
Allocated reserves for emerging economies in the IMF data fell by $135 billion, while developed economies saw reserve accumulation of $113 billion, driven primarily from Japanese and Swiss intervention. Such large accumulation in developed countries has not been seen since the second-quarter of 2010, note analysts at Nomura.
While the USD was a beneficiary of the uncertainty surrounding the eurozone, valuation rather than pure allocation might help explain some of the accumulation. In a study conducted by the Royal Bank of Scotland last year, when the level of USD reserves was falling, it was estimated that the valuation effect on the percentage share of allocated reserves for select reserve currencies accounted for about half of the decline in the percentage allocated to USD-denominated assets.
Interestingly, allocations of other currencies fell for the first time in 10 quarters. However, it should be noted that the data only included allocated FX reserves.
Emerging economies continue to hold a larger percentage of their reserves in EUR (28% versus 24% for developed nations). However, analysts expect them to shed some of that exposure in the coming quarter, which is expected to weigh on the euro in 2012.