In 2020, the proportion of dollars in nations’ foreign currency reserves dipped below 60 percent for the first time since 1995, the International Monetary Fund (IMF) reported.
In contrast, the euro’s share of reserves rose to 21.2 percent, the IMF found, its greatest share in six years; Japan’s yen claimed 6 percent, more than it has in two decades.
The discovery reignited speculation that the dollar is waning as the world’s reserve currency of choice.
The IMF report does not necessarily mean the buck is falling from favor, analyst Mike Bird wrote in the 16 April Wall Street Journal.
First, the dollar depreciated in 2020, making it worth less than other currencies. A currency’s relative value, not the amount of buying and selling it undergoes, is a key factor in the IMF’s rankings, Bird noted.
Second, the yen’s rise is due, in part, to currency swaps made with the U.S. Federal Reserve to prop up Japan’s economy during the 2020’s crisis.
Third, the private sector now owns more U.S. Treasury securities than has been typical and governments and their foreign-exchange reserves own less. Treasuries have been a safe haven for value during the chaos of the past year.
So, while governments’ dollar holdings have shrunk, ownership in the private sector has grown.
Also, the falling dollar should be a factor in restoring some of its value, Bird contends.
As the dollar’s value falls, especially relative to the currencies of exporting countries with hefty dollar reserves, those countries could be expected to buy more Treasury securities to keep their currencies from spiking in value and making their exports more expensive in the U.S., he argues.
“Even if the greenback’s official share [of foreign currency reserves] falls further, its position at the distant top of the global currency hierarchy looks quite secure for now,” Bird concluded.
TREND FORECAST: We maintain our forecast for rising inflation and a weaker U.S. dollar. Indeed, the reason it has not fallen sharply is that there is, at this time, no global competition considering that the euro, its main competitor, has not strengthened since the Eurozone economy remains weak.
Despite rising inflation, the Federal Reserve will not sharply raise interest rates since the higher rates go, the faster the equity will crash as Wall Street money junkies can no longer get cheap money to gamble. Merger and acquisition activity will also slow down dramatically.
