Dollar's Dominance Eroded at 10 Times the Pace Seen in Past 2 Decades

“strategists Joana Freire and Stephen Jen calculated that the greenback accounted for about two-thirds of total global reserves in 2003, then 55% by 2021, and 47% last year.” https://t.co/CDeqXEhkTn

— Luke Gromen (@LukeGromen) April 18, 2023

"Strategists Joana Freire and Stephen Jen calculated that the greenback accounted for about two-thirds of total global reserves in 2003, then 55% by 2021, and 47% last year.”

Here's another take.

It is hard to know, frankly, where to start.

To begin with, the immobilization of Russia's reserves actually froze far more euro than dollar reserves, and it showed that shifting your reserves to Europe wasn't sufficient to offer real protection from coordinated sanctions.

2/

— Brad Setser (@Brad_Setser) April 19, 2023

Setser "The dollar's share of reserves didn't actually change at all in 2022."

But if the IMF's data on reserve holdings is adjusted for changes in US bond market valuation, I don't get any real US dollar sales --

No currency got large reserve inflows in 22 in fact.

5/ pic.twitter.com/XWFN9zdzGX

— Brad Setser (@Brad_Setser) April 19, 2023

What About China?

And looking at reserves without also looking at the foreign assets of state banks and SWFs is so ... 2012.

The cutting edge of flow tracking (imo) captures SWFs, forwards, state banks and the like ...

7/ pic.twitter.com/K5RRVN2n51

— Brad Setser (@Brad_Setser) April 19, 2023

Setser "And looking at reserves without also looking at the foreign assets of state banks and SWFs is so ... 2012."

China masks its reserves in SOEs, something I have commented on many times. 

And Look at Agencies (Mortgage Backed Securities)

But don't take my word for it -- the US BoP data has a line item for official flows (reserves + SWFs). It ain't perfect. Yet it is the official number, and it showed a net inflow into the US (gotta include the Chinese flow into Agencies!)

9/ pic.twitter.com/Hn0U5Kq2fl

— Brad Setser (@Brad_Setser) April 19, 2023

What About Japan?

There is no doubt that total reported dollar reserves did fall in 2022. Some folks did intervene -- tho the MoF hardly moved away from the dollar when it sold fx to support the yen. Others moved to SWFs.

12/ pic.twitter.com/IbYe2PeRo9

— Brad Setser (@Brad_Setser) April 19, 2023

Japan sold US dollar reserves to prop up the Yen. That's hardly a measure of dollar reserve weakness.

I am not an apostle of "dollar dominance" -- I am most associated in fact with the argument that excessive accumulation of fx reserves actually causes problems for the US and the global financial system (including safe asset shortages and the like)

14/

— Brad Setser (@Brad_Setser) April 19, 2023

Deceleration in Global Reserve Growth 

Update: here is a chart with the IMF's data on global reserves, with no adjustments (other than assuming that unallocated = allocated)

to me the story isn't the dollar's rather constant share since 2014, but the deceleration in global reserve growth pic.twitter.com/xrJosZUmcA

— Brad Setser (@Brad_Setser) April 19, 2023

What About Russia?

But to me that isn't much of a surprise --

Russia clearly did shift out of the dollar over this period

(China clearly did not, but that's misleading as it shifted away from reserves toward state banks)

— Brad Setser (@Brad_Setser) April 19, 2023

The US weaponized the dollar against Russia. 

Dollar Appreciation

agree 100%

— Brad Setser (@Brad_Setser) April 19, 2023

Michael Pettis Chimes In

Brad Setser on Chinese "reserves" versus Chinese reserves. https://t.co/4sIzPhvXW8

— Michael Pettis (@michaelxpettis) April 19, 2023

That's a new thread with a spotlight on China. 

Brazil’s President Calls for End to US Dollar Trade Dominance

Despite the alleged success in ending the dollar's dominance, please note Brazil’s President Calls for End to US Dollar Trade Dominance

Brazil's president, Luiz Inácio Lula da Silva, wonders: “Every night I ask myself why all countries are forced to do their trade backed by the dollar. Why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

This is more than a bit amusing. No one is forcing Brazil, Russia, India, and China (the BRICs) to do trade in dollars.

Trade Example

• A Brazilian soybean producer sells soybeans to a merchant in China.
• A Brazilian scooter manufacturer buys Lithium batteries from a Chinese merchant.
• The soybean producer buys nothing from Chinese merchants.
• The Chinese battery producer buys nothing from Brazilian merchants.

Why would the Brazilian soybean producer want to hold yuan, especially given that the yuan doesn't even float?

Why would the Chinese battery producer want to hold the Brazilian Real?

Trade is not between nations, it is between individuals and corporations. No one is forcing the soybean producer or the battery producer to do anything. 

By choice they prefer to trade in dollars, instantly convertible to any currency the producers may wish to hedge in. In contrast, the yuan doesn't even float.

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