The US dollar has long played a major role in global markets. It continues to do so as the U.S. economy has been producing a declining portion of global production over the past two decades.
But while the existence of currency in international trade, international debt, and non-bank lending still far exceeds the US trade, bond issuance, and foreign lending, central banks do not hold their greenback savings so much that they once did.
In the wake of a major overhaul of foreign trade, the Bank of Israel has recently unveiled a new $ 200 billion investment strategy. Starting this year, it will reduce the share of the U.S. dollar and increase the portfolio share in the Australian dollar, the Canadian dollar, the Chinese renminbi and the Japanese yen.
As we write in a recent IMF working paper, the reduced role of the US dollar has not been matched by rising shares of other traditional currencies: the euro, the yen, and the pound. Moreover, although there has been some increase in the budget held in the renminbi, this accounts for only one-fourth of the dollar departure in recent years, in part due to China’s relatively closed currency account. In addition, a review of the data mentioned in the worksheet shows that, at the end of last year, one country — Russia — held about a third of the world’s renminbi sites.
In contrast, small currencies that have never been prominent in portfolios, such as the Australian and Canadian dollars, the Swedish krona and the winning South Korean, make up three-quarters of the change from the dollar.
Two factors can help define the mobility of this financial set:
• These costs include higher return and lower flexibility compared. This is a major attraction for central bank executives as foreign exchange rates grow, increasing the share of portfolio distribution.
• New financial technologies — such as automated markets and cash flow systems — make it cheaper and easier to trade currency for smaller economies.
In some cases, issuers of these currencies also have bilateral exchange lines with the Federal Reserve. This can be argued, creating confidence that their investments will hold their value relative to the dollar.
At the same time, the value of this feature can be questioned. Non-traditional currencies often float. In fact, they are highly volatile compared to the dollar. And their issuers are rarely drawn on their two-nation exchange lines with the Fed. The retreat analysis shows that having a Fed exchange rate is associated with a 9 percent increase in the recipient’s dollar dollar reserve. This may indicate that the exchange lines are incomplete of the actual repository.
The rationale is that these non-traditional reserves are issued by countries with open financial accounts and tracking sound and stable policy records. Key performance indicators for investments include not only economic weight and financial depth, but also clear and predictable policies. In other words, economic stability and policy decisions are essential for global acceptance.
Global stock market declaration confirms that a higher economic risk premium, measured at the expense of outgoing debt to be guaranteed automatically, reduces the share of the world’s reserves. Obviously, owners prefer the currencies of countries known for good governance, economic stability and sound money.
For more read: https://blogs.imf.org/2022/06/01/dollar-dominance-and-the-rise-of-nontraditional-reserve-currencies/
