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Central bankers agree: the dollar’s still the top dog

We’ve been writing about the international monetary system for long enough to be somewhat dubious about oft-repeated claims of the dollar’s demise.

Sure, we can see why the greenback ought to be dethroned. The US is no longer the economic power it once was, inflation’s at multi-decade highs, and now Washington has frozen hundreds of billions of dollars worth of assets held by regimes it doesn’t like.

But history tells us that global reserve currency status tends to work like Teflon in reverse — it’s really hard for all of that exorbitant privilege to come unstuck. Our faith in the dollar is only bolstered when we come across nuggets such as this:

That particular piece of evidence comes courtesy of Central Banking’s latest annual poll of official sector reserve managers — that is, the people responsible for investing the rainy-day stockpiles built up by central banks across the world.

The poll of 82 reserve managers, who together manage reserves worth a whopping $7.3tn — or 48 per cent of the world’s total — was conducted between February and mid-March. So some of the respondents might have reassessed their answer following the decision to put about $300bn-worth of the Russian central bank’s assets on ice due to Moscow’s invasion of Ukraine.

But frankly we doubt there’s been too much of a reassessment among this crowd. For large, conservative investors such as these, there is simply no real alternative. As this respondent to the poll noted:

It’s not about absolute security. It’s about the relations between selected currencies. And measured by relative value, USD is still the largest economy in terms of taxes generation, it is the most technological economy (the largest global technology companies are from the US), it has the biggest financial market, the most transparent regulation and the longest tradition.

That’s not to say that there hasn’t been interest in other currencies too — over half of the survey respondents invest in the Australian and Canadian dollars, and in the renminbi. Interest in alternatives is on the up too:

Compared with last year’s survey, the numbers investing in Australian and Canadian dollars increased marginally, but the increase for renminbi is significant — 41 in 2022 compared to 33 in 2021. Indeed, the onshore renminbi is poised to win more converts, with 14% of respondents saying they are considering investing now. Interestingly, the number of respondents investing in the offshore renminbi is lower than the 2021 figure of 22…

. . . Viewed regionally, reserve managers from African central banks are notable for investing in the renminbi (both on- and offshore), and real at above sample percentages, as well as the South African rand. Reserve managers from the Americas favour Scandinavian currencies as well as the Singapore dollar and Korean won. The won is popular among reserve managers from Asia: one- third of the sample invest in this currency, compared to 19% in the survey. Just over 70% of reserve managers invest in the Australian dollar and nearly half in the New Zealand dollar, both considerably higher than the survey. There was considerable support for the Singapore dollar too.

But, in terms of the big picture, these efforts at diversification are piecemeal. As the IMF’s quarterly summation of the currency composition of the official sector’s assets repeatedly show:

Of course, at some point this will all change. No reserve currency remains on top forever. But, if central bank reserve managers have anything to do with it, the dollar’s going nowhere anytime soon.

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