Central bankers agree: the dollar is still the best dog
We’ve been writing about the international monetary system long enough to cast some doubt on repeated claims of the demise of the dollar.
Of course, we can see why the greenback should be dethroned. The United States is no longer the economic powerhouse it once was, inflation has hit multi-decade highs, and now Washington has frozen hundreds of billions of dollars in assets held by regimes it doesn’t. do not like.
But history tells us that status as the world’s reserve currency tends to work like Teflon inside out – it’s really hard for all that exorbitant privilege to peel off. Our faith in the dollar is only strengthened when we encounter nuggets like this:
This particular piece of evidence is courtesy of central bankfrom the latest annual survey of official sector reserve managers, i.e. the people responsible for investing the bad weather stocks built up by central banks around the world.
The survey of 82 reserve managers, who together manage reserves worth a colossal $7.3 billion – or 48% of the global total – was conducted between February and mid-March. Thus, some of the respondents may have reassessed their response following the decision to put about $300 billion in Russian central bank assets on ice due to Moscow’s invasion of Ukraine.
But frankly, we doubt there’s been too much reappraisal among that crowd. For large conservative investors like these, there is simply no real alternative. As this survey respondent noted:
It’s not about absolute security. These are the relationships between the selected currencies. And measured in relative terms, the USD is still the biggest economy in terms of tax generation, it’s the most tech-savvy economy (the world’s biggest tech companies are from the US), it’s got the most largest financial market, the most transparent regulation and the longest tradition.
That’s not to say there hasn’t been interest in other currencies too – more than half of survey respondents invest in Australian and Canadian dollars, and the renminbi. Interest in alternatives is also on the rise:
Compared to last year’s survey, the number of investments in Australian and Canadian dollars increased slightly, but the increase in the renminbi is significant – 41 in 2022 compared to 33 in 2021. Indeed, the onshore renminbi is poised to gain more converts, with 14% of respondents saying they plan to invest now. Interestingly, the number of respondents investing in the offshore renminbi is lower than the 2021 figure of 22…
. . . From a regional perspective, African central bank reserve managers stand out for their investments in the renminbi (both on- and offshore) and in the real at the above sampling percentages, as well as in the South African rand. Reserve managers in the Americas favor Scandinavian currencies as well as the Singapore dollar and Korean won. The won is popular among Asian reserve managers: a third of the sample invests in this currency, compared to 19% in the survey. Just over 70% of reserve managers invest in the Australian dollar and almost half in the New Zealand dollar, both considerably higher than the survey. The Singapore dollar also received considerable support.
But, on the whole, these diversification efforts are piecemeal. As the IMF’s quarterly sum of the currency composition of official sector assets repeatedly shows:
Of course, at some point, all of that will change. No reserve currency stays on top forever. But, if central bank reserve managers have anything to do with it, the dollar isn’t going anywhere anytime soon.