Global de-dollarization resumed in the second quarter according to data recently released by the International Monetary Fund (IMF).
While the dollar’s share of global reserves increased in the first quarter of 2020, it fell sharply in the second quarter, resuming a downward trend of more than two years.
The share of the euro in world reserves has increased slightly and the share of the yen has fallen. The second quarter saw the largest accumulation of reserves in Chinese RMB and “other currencies”
The increase in dollar reserves in the first quarter was likely an anomaly triggered by increased valuation and safe-haven purchases during the early stages of the COVID-19 panic.
A Bank of America report concluded that “the theme of de-dollarization appears intact.” According to his data, the share of US holdings fell to 61.3%, “slightly more than expected based on changes in valuation of currencies, bonds and stocks.”
Central bank reserves have increased significantly around the world as they have intervened aggressively in foreign exchange (FX) markets. Total foreign exchange reserves reached over $ 12 trillion. According to ZeroHedge’s analysis, most major countries saw an increase in foreign exchange reserves in the second quarter, with the exception of Turkey. This country continues to bleed its reserves in order to stabilize its currency.
There has been a decoupling between the level of dollar reserves and the trade-weighted USD index – a measure of the currency’s strength weighted by the country’s trade volume.
According to ZeroHedge, “This divergence between the level of USD reserves and that of the USD TWI is expected to persist as the world decouples from the USD as a notional benchmark anchor.”
According to the BoA report, no single currency has stood out as having benefited from the process so far. Instead, many central banks have turned to gold.
Central bank gold purchases have slowed somewhat this year after record purchases in 2018 and 2019. But central bank gold purchases are expected to rebound in 2021, analysts at Citigroup and HSBC Securities say.
The central bank demand amounted to 650.3 tons last year. This was the second highest level of annual purchases in 50 years, just slightly below 2018 net purchases of 656.2 tonnes. According to the WGC, 2018 marked the highest annual level of net gold purchases by the central bank since the suspension of convertibility of the dollar to gold in 1971, and the second highest annual total on record.
Some analysts believe China and Russia will start increasing their holdings of gold again next year. Both countries have been aggressive in reducing their exposure to the dollar, but recently suspended their gold purchases.
Earlier this year, Russia announced that it would halt its gold purchases from April. Meanwhile, the People’s Bank of China has not reported any gold purchases for 10 months. It is not uncommon for China to shut up and suddenly announce a sharp increase in reserves. The Chinese government has hinted that it could get rid of more US Treasuries from its reserves. It wouldn’t come as a shock if the Chinese replaced American debt with gold.
We have watched this de-dollarization trend over the past few years and have written extensively on efforts to minimize dollar exposure by countries like Russia and China and their desire to undermine the ability of the United States. to turn the dollar into a weapon as a foreigner. political tool.
The slowdown in the dollar’s share of reserves does not yet threaten its status as the world’s reserve currency, but it could be a canary in the coal mine. It’s definitely a trend to watch closely.
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