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Senior Vice-President for Research and Innovation, Professor of Theoretical Physics, Michigan State University

Thursday, June 30, 2005

FX update

According to BIS figures published this week global central bank currency reserve diversification has been larger and faster than previously thought. Stories of central banks divesting their dollar holdings have been common in the past two years. However, hard evidence is difficult to come by as official data is only available on a sporadic basis in the form of the BIS and IMF annual report. The latest BIS annual report published this week, therefore, provides an important benchmark to the extent and pace of diversification. In a break from the past, this year the BIS published a series of the dollar’s share of global FX reserves in constant (2003) exchange rates. This controls for the variations in exchange rates that can depress or exaggerate a currency’s share in reserves. For example the weakness of the US dollar in the past three years would tend to deflate the dollar’s share of reserves even if the actual holdings of dollar reserves were constant.

Surprisingly, the BIS numbers are somewhat different to those published in the IMF annual report in September 2004. At the end of June 2004, the BIS estimate that 65.5% of reserves were held in US dollars. While this is not significantly different from the IMF reading of 63.8% at the end of 2003, the pace of reduction in dollar holdings is far quicker in the BIS data set. The share has fallen from 77% in 2001 (see chart for more details). The BIS also shows that the euro has been the main beneficiary of this change, with the share of euro reserves more than doubling since 1999 to 23.6%. (Source: State Street, via our correspondent)

At present the main currencies are not far from their post BW I averages in real effective terms. The NZD, GBP, TWD, SEK and SGD were the only currencies that were more than 15% off their respective averages:


Anonymous said...

i need to look at the report again -- i was focused on what they did not publish, i.e. the breakdown of 2004 reserve accumulation into an increase in dollar and non-dollar reserves that I may have missed what they did publish.

thanks --

brad setser

Anonymous said...

steve -- take a look at the graph on p. 95 of this report, the 2005 bis annual report. Graph is v.12.


to me, it looks a bit different than the graphs you posted via state street. notably -- as of june 04, the lastest data entry -- the dollar's share of global reserves had rebounded a bit, while the euro's share had fallen a bit. that makes some sense, since Japan bought a ton of reserves at the tail end of 03/04 and we know those went mostly into dollars. in constant dollars, the 04 bis report suggested that the overwhelming share of global reserves purchased in 03 went into dollars -- something like 90%. that would explain the constant dollar rebound in the dollar's share that seemed to start in 03 in this chart too.

I wonder if state street used the 04 annual report charts by mistake. i ask this in part b/c on of the other charts has "03 and 04" as estimates -- and at this stage, 03 should not be an estimate any more.

brad setser

Anonymous said...

last comment. graph v.6 definately comes from the 05 annual report, despite the 03 estimate.

but the global reserve composition graph doesn't match graph v.12 in several ways. v. 12 has a slightly lower peak for dollar reserve share -- it never rises to touch 75%. the fall off is less pronounced, and then v. 12 has a rebound in dollar reserve share.


Steve Hsu said...

Hi Brad,

Interesting comments. I can't really comment on whether State Street might have been using slightly old data.

I'm very curious to know whether some CBs are using the recently strengthening of the dollar as an opportunity to diversify. I know that I'm considering it...


Anonymous said...

some central banks are --

UAE, qutar ...

the question is how many, and how much ...

brad setser

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