Dollar reserves weather sanctions shock :Mike Dolan
The weaponisation of foreign currency holdings by Western governments which froze Russian assets after Moscow invaded Ukraine doesn’t seem to have spooked reserve managers for now. Many may even lift U.S. dollar holdings.
The latest numbers from the International Monetary Fund on Thursday showed the dollar’s share of the more than $12.5 trillion world currency reserves was unchanged at 58.8% in the first quarter – even after the invasion and retaliatory financial sanctions on Moscow in late February.
That may disguise a marginal 1-2% decline in its actual share when shifting currency values during the quarter are taken into account and the fact the overall global tally dropped by about a third of 1 trillion dollars from record peaks last year.
The euro’s share slipped marginally to 20.6% on the face of it, but this too is likely down to exchange rate effects too.
And any switch that could be detected went to the half dozen or so other currencies held most widely.
In short, no shock or sudden lurch in reserve management more widely following the move by G7 and European Union governments to freeze of about half the Russia central bank’s $640 billion foreign holdings.
While central banks are loth to disturb sensitive stockpiles overnight, the lack of any immediate shift may surprise those who felt this rare sanction may make other central banks wary of leaving national savings in Western markets for fear of a similar fate in the event of any future political clash.
Not only did the IMF reading show dollar holdings relatively unscathed initially, but an annual UBS survey of some 30 reserve managers over the past three months showed many may even end up adding more dollars.
DON’T HOLD YOUR BREATH
In a series of questions related to their reaction to the Russian freeze, 60% said they expected at least some impact and 10% saw a “significant” fallout. More than a quarter expected another large central bank to face sanctions comparable to those on Russia over the coming years.
But almost two thirds saw either a zero or limited impact on the dollar’s role within reserves more broadly.
But perhaps more strikingly, given initial concerns, almost half saw the dollar benefiting most from a shift to a more multipolar world following recent events.
While 80% saw China’s yuan benefiting from that, that’s less surprising given that the yuan currently only accounts for less than 3% of world reserves.
While almost 60% said they had taken to direct actions so far, a net positive response of almost 10% said they had actually increased their exposure to U.S. Treasuries.
Two thirds said it would accelerate the adoption of central bank digital currencies.
Taking everything into account going forward – not just the Russian sanctions – the only currencies that more respondents expected to reduce than increase were the Japanese yen and Britain’s pound.
They were as split as many in the market on whether the whole constellation of recent events meant we had entered a new paradigm for inflation and fixed income.
When asked if they see the turning point in the 40-year bond bull market, 54% replied yes and 46% no. When asked if the current increase in inflation is transitory or permanent, 48% choose transitory and 52% permanent.
If a reserves quake is due, don’t hold your breath.
“We may see some marginal diversification over a very long period of time, but the dominance of the dollar will remain,” said Capital Group’s fixed income director Flavio Carpenzano.
The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own
Source: Reuters (By Mike Dolan, Twitter: @reutersMikeD; Editing by Edmund Blair)