On Wednesday, the IMF released the latest Currency Composition of Official Foreign Exchange Reserves (COFER) report for Q2 2020. It showed that while the Dollar share of global reserves had increased in Q1 2020, likely on a combination of valuation effects and safe-haven demand, trend reversed abruptly in Q2 as shown in the Goldman chart below.
The contraction in dollar reserves is hardly new: prior to the Covid-19 pandemic, the Dollar share of allocated reserves had been trending lower over the past two years (chart below, left), but that trend was interrupted in Q1 2020. However, the market recovery in Q2 helped to reverse most of the increase in the Dollar’s share from earlier this year. At the same time, the share of Euro reserves rebounded somewhat in Q2.
Additionally, the share of Yen reserves declined both on a headline basis and after adjusting for FX valuation changes. Here, Goldman notes that a number of central banks appear to take advantage of the yield enhancement provided by wide cross currency bases, so this likely overstates the demand for JPY reserves on a net basis, and the unwind of this trade has likely contributed to the Yen’s declining share in 2020. Meanwhile, the share of CNY reserves continues to steadily but slowly increase in what may be the most ominous trend in global reserve flows. Read more…..
Chart of the Day
Amid rising tensions over technology and geopolitics, #American billionaire investor Ray Dalio has warned that the conflict between the U.S. and #China could develop into a “capital war,” which would damage the dollar. Meanwhile, international investment bank Goldman Sachs warned recently the U.S. dollar is in danger of losing its status as the world’s reserve currency. So, how likely is a capital war, will the dollar lose reserve currency status, and as economic ties suffer, what are the implications for the U.S. and the world economy?