The views expressed in this column are solely those of the author and do
not reflect the views of SVB Financial Group, or Silicon Valley Bank,
or any of its affiliates.
The U.S. dollar's importance as a reserve currency has been
declining for more than a decade. The highest percentage, 70.9 percent, was
reached in 1999 as compared to the 2010 level of 61.4 percent. The value of the
dollar, as measured by the Dollar Index (DXY), has declined over the same
period. The DXY peaked at 121.02 in 2001 when the dollar still made up 70.7
percent of global reserves. The following year the reserve percentage dropped to
66.5 percent and the DXY dropped to 101.80. The decline in the dollar's reserve
percentage over the last 11 years from 70.9 percent to 61.4 percent, was
mirrored by a decline in the dollar's value as measured by the DXY from 121.02
to 75.63. The moves in the DXY are a multiple of the corresponding moves in the
reserve percentage for several reasons; one is that while the reserve number is
an absolute percentage, the index reflects the compounding effect of selling the
dollar and also buying another currency. Other factors which may distort the
relationship between the two measures are the inclusion of gold, SDR's and IMF
reserve positions in the reserve totals.
There is a good chance that this trend will continue according
to a recent survey of central bank reserve managers, sovereign wealth funds and
multilateral institutions. The survey, which was carried out by UBS (Union Bank
of Switzerland), the largest Swiss bank, predicts that a portfolio of
currencies, rather than the dollar, will be the main currency reserve component
within the next 25 years. This marks a departure from previous years, when the
central bank reserve managers have said the dollar would retain its defacto
status as the world's sole reserve currency.
The results showed that 52 percent of those surveyed expected
that the SDR*, or a portfolio of currencies, would be the global reserve
currency in 25 years. The dollar came in a distant second at 27 percent; Asian
currencies were third with 11 percent; gold was next at 6 percent; and in last
place was the euro with 4 percent.
The survey participants were more than 80 central bank reserve
managers, sovereign wealth funds and multilateral institutions with more than
$8,000 billion in assets.
The results are partially a sign of dissatisfaction with the
dollar as a reserve currency, amid concerns over the U.S. government's inability
to rein in spending and the Federal Reserve's huge expansion of its balance
But if these were the determining criteria, the participants
would not be buying euros either. Nevertheless, the U.S. currency has slid 5
percent so far this year, and is trading close to its lowest ever level against
a basket of the world's major currencies.
Holders of large reserves, most notably China, have been
diversifying away from the dollar. In the first four months of this year, three
quarters of the $200 billion expansion in China's foreign exchange reserves to a
record $3.045 trillion was invested in non-U.S. dollar assets, Standard
Chartered estimates. Additionally, Russia, Taiwan, Brazil, India, South Korea,
Singapore (which have a total of $ 2.1 trillion in reserves) and a score of
smaller nations have been following a similar course.
The prediction of a multipolar currency world replacing the
current dollar dominance aligns with the thinking of some leading policymakers.
Robert Zoellick, president of the World Bank, has proposed a new monetary system
involving a number of major global currencies, including the dollar, euro, yen,
pound and renminbi. This system should also make use of gold, Mr. Zoellick
added. The results of the poll also point to a growing role for bullion, with 6
percent of reserve managers surveyed saying the biggest change in their reserves
over the next decade would be the addition of more gold. In contrast to previous
years, none of the managers surveyed was intending to make significant sales of
gold in the next decade.
Central banks have bought about 151 tons of gold so far this
year, led by Russia and Mexico, according to the World Gold Council, and are on
track to make their largest annual purchases of bullion since the collapse in
1971 of the Bretton Woods system, which pegged the value of the dollar to gold.
The reserve managers predicted that gold would be the best performing asset
class over the next year, citing sovereign defaults as the chief risk to the
Since gold is priced in dollars, increasing gold reserves also
increases dollar reserves, which, for the central banks wishing to reduce the
percentage of their reserves held in dollars, will need to be offset by selling
dollars for another currency. Gold has risen 19.5 percent in the past year to
trade over $1,500 a troy ounce, which also means more dollar reserves which
potentially need to be hedged.
The reserve flows are certainly not the sole determinant of the
value of the dollar, but their influence, over time, should not be
underestimated. As both the U.S. and Europe are currently facing uncertain
financial and economic futures and are now operating from position of relative
weakness, it is difficult to assess which currency will be stronger in the
future. What does seem certain is the ongoing decline in the percentage of
reserves held in dollars and the negative impact this will have on the value of
the dollar. This policy shift coincided with a decline in the value of the
dollar of 35-40 percent over the last decade and its continuation may well lead
to a similar move over the next five to ten years. A EUR/USD rate approaching
2.00, USD/CHF at 0.60, USD/CNY at 4.20 and GBP/USD at 2.15, are all potential
levels for the dollar looking forward using the past impact of the shift in
*The SDR is an international reserve asset, created by the
IMF in 1969 to supplement its member countries' official reserves. Its value is
based on a basket of four key international currencies, and SDRs can be
exchanged for freely usable currencies.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.