U.S. Dollar Loses Shine as Reserve Currency for Emerging Economies
TOKYO (Dispatches) - The share of U.S. dollar-denominated assets in the world’s foreign reserves sank for the fifth straight year in 2020 to 59%, its lowest level in a quarter century, as emerging economies like China and Russia diversify holdings amid concerns over the greenback’s prospects.
As a trusted and liquid asset, U.S. government bonds have long been a go-to option in foreign reserves, which governments and central banks maintain as a backup fund of sorts in case of a monetary emergency.
But data from the International Monetary Fund suggests the dollar may be starting to lose its draw as a reserve currency. As the coronavirus exacerbates the so-called twin deficit in the U.S., casting doubt over the dollar’s long-term value, authorities around the world are starting to place more weight on assets in alternative currencies as well as nonmonetary options like gold.
According to a tally of 149 countries and regions by the IMF, global foreign reserves totaled $12.7 trillion at the end of 2020. Dollar-denominated assets in particular increased 4% to $7 trillion.
"This is partly because emerging economies intervened in the market by offloading their home currencies for the dollar, so they could keep their currencies from strengthening and squeezing their exports,” said Daisuke Karakama, chief market economist at Japan’s Mizuho Bank. The U.S. had also issued more government bonds to fund large-scale coronavirus stimulus measures.
But as a percentage of allocated foreign reserves, dollar-denominated assets fell 1.7 points to 59% as of the end of 2020. It last fell below the 60% mark in 1995.
Dollar assets made up more than 70% of global reserves at the end of 2001, but have since been trending down.
As a trusted and liquid asset, U.S. government bonds have long been a go-to option in foreign reserves, which governments and central banks maintain as a backup fund of sorts in case of a monetary emergency.
But data from the International Monetary Fund suggests the dollar may be starting to lose its draw as a reserve currency. As the coronavirus exacerbates the so-called twin deficit in the U.S., casting doubt over the dollar’s long-term value, authorities around the world are starting to place more weight on assets in alternative currencies as well as nonmonetary options like gold.
According to a tally of 149 countries and regions by the IMF, global foreign reserves totaled $12.7 trillion at the end of 2020. Dollar-denominated assets in particular increased 4% to $7 trillion.
"This is partly because emerging economies intervened in the market by offloading their home currencies for the dollar, so they could keep their currencies from strengthening and squeezing their exports,” said Daisuke Karakama, chief market economist at Japan’s Mizuho Bank. The U.S. had also issued more government bonds to fund large-scale coronavirus stimulus measures.
But as a percentage of allocated foreign reserves, dollar-denominated assets fell 1.7 points to 59% as of the end of 2020. It last fell below the 60% mark in 1995.
Dollar assets made up more than 70% of global reserves at the end of 2001, but have since been trending down.