The dollar may still be the
dominant reserve currency hoarded in central bank coffers, but
it does not quite hold the commanding position of yore.
Its share has dropped from 71.5
percent of official forex "allocated reserves" at the beginning
of the 2000s forex reserves whose currency denomination
is known to just over 60 percent today.
In the meantime, though, no single
currency has quite managed to usurp the greenback.
Instead, foreign central banks have
favored a more diversified portfolio, according to IMF data.
The combined share of allocated reserves held by the euro and
dollar has dropped from just above 90 percent in mid-2009 to 87
percent only three years later. Is it possible that central
banks will continue diversifying their forex portfolios
creating a wide range of currencies with an equally good, or
bad, claim to be global reserve currencies?
The IMF numbers do not tell us
which currencies account for this diversification: The
lions share of it comes from the IMFs mysterious
"claims in other currencies" category. This figure, which
excludes sterling, the yen and the Swiss franc, as well as the
dollar and the euro, has quadrupled since late 2007 to $310
billion-worth. The increase in the overall share of allocated
reserves held in "other currencies" has risen over the same
period from only 1.8 to 5.3 percent.
Central banks are diversifying
their currency reserves out of a "prudent desire for profit
maximization," says David Marsh, co-chairman of the Official
Monetary and Financial Institutions Forum (Omfif) in London,
which exists to promote dialogue among government and private
sector financial organizations. Marsh says central banks are
trying to turn their forex reserves into "profit centers."
Private sector investment managers seeking to earn a return
from their portfolios usually choose to diversify, and to an
increasing extent, central banks are no different these days.
"Portfolio diversification theory suggests they should hold a
greater number of currencies," says Marsh.
Which currencies are likely to gain
from this? A little-noticed piece of recent news from the IMF
gave a strong clue to investors as to what the up-and-coming
reserve currencies are. In November it revealed that it was
considering, from next year, requesting and then publishing
data on the central banks forex reserves of Australian
and Canadian dollars a symbolically important move,
which unofficially confers on them the status of reserve