PIIE Blog | RealTime Economic Issues Watch
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
Subscribe to RealTime Economic Issues Watch Search
RealTime Economic Issues Watch

How Fast Is the US Dollar’s Share of International Reserves Declining?

by | June 27th, 2011 | 05:02 pm
|

On June 30, the International Monetary Fund (IMF) will release an update of its Currency Composition of Official Foreign Exchange Reserves (COFER) database. The most recent release on March 31 indicated that over the eight quarters to the end of 2010, the dollar’s quantity share of all countries’ foreign exchange reserves had decreased by a substantial 3.5 percentage points and the euro’s share had increased by 1.5 percentage points. The trend was interpreted by some as suggesting that the dollar was losing favor as a reserve currency, in particular relative to the euro, perhaps because of widespread concern over US fiscal and monetary policies. That perception may have been based on incomplete information, however. In fact, these data can be distorted by the pace of reserve accumulation by individual countries as well as by the specific reserve currency preferences of those countries. Between the end of 2008 and the end of 2010, the COFER data were affected by the Swiss National Bank’s (SNB) large-scale purchases of foreign exchange to prevent the Swiss franc from appreciating as well as by the Bank’s pre-existing and predominant preference for euro-denominated reserves. Absent the Swiss National Bank’s extraordinary purchases, the COFER data would have shown a much reduced diversification trend away from the dollar over this period and essentially no trend toward the euro.

Table 1 presents the value and quantity shares and changes in those shares over the past 8 quarters for the dollar and the euro in all reporting countries’ international reserves and in the reports from the advanced countries. Value shares are calculated using the data published in the IMF’s COFER database. Quantity shares are derived by applying the methodology described in Truman and Wong (2006) and they are adjusted for the effects of exchange rate fluctuations.

In the fourth quarter of 2008, the dollar’s value share of all countries’ foreign reserve holdings was 64.1 percent. That share had decreased by 2.7 percentage points by the end of 2010. The dollar’s value share of advanced countries’ reserves was 67.2 percent and decreased by 3.1 percentage points over the eight-quarter period. The euro’s value share in all countries’ reserves decreased slightly over this period, from 26.4 percent at the end of 2008 to 26.3 in the fourth quarter of 2010. On the other hand, the euro’s share of advanced countries’ reserves increased by 2.2 percentage points, from 22.4 percent in the fourth quarter of 2008.

The dollar’s quantity share of all reserves was 66.8 percent in the last quarter of 2008 and 63.3 percent in the last quarter of 2010, a drop of 3.5 percentage points.1 The dollar’s quantity share of advanced countries’ reserves dropped 3.6 percentage points.

There was a corresponding rise in the quantity share of the euro in all reserves over this period. The euro’s quantity share of all reserves was 23.0 percent in the last quarter of 2008 and increased 1.5 percentage points over this period. The euro’s quantity share in the reserves of the advanced countries increased by 3.3 percentage points.

     
  Table 1: Dollar and Euro Value and Quantity Shares  
         
    Value Share Quantity Share  
   
 
    2008 Quarter 4 2010 Quarter 4 Change 2008 Quarter 4 2010 Quarter 4 Change  
   
 
  All Countries Dollar Share 64.1
percent
61.4 
percent
- 2.7 percentage points 66.8
percent
63.3
percent
- 3.5 percentage points  
  All Countries Euro Share 26.4
percent
26.3 
percent
-.1 percentage points 23.0
percent
24.5
percent
+ 1.5 percentage points  
  Advanced Countries Dollar Share 67.2
percent
64.2
percent
-3.1 percentage points 71.3
percent
67.7
percent
- 3.6 percentage points  
  Advanced Countries Euro Share 22.4
percent
24.6 
percent
+ 2.2 percentage points 19.1
percent
22.4
percent
+ 3.3 percentage points  
 
 

The Swiss National Bank, along with the authorities of a number of other countries, regularly releases detailed information on the currency composition of its international reserves. This allows us to examine the influence of the Bank’s intervention and portfolio allocation decisions on the aggregate COFER data.  The Swiss National Bank increased its reserves more than four-fold over the period from the end of 2008 to the end of 2010, from $45 billion to $218 billion, as depicted in figure 1. During this period, the Swiss National Bank added $41 billion to its US dollar reserves, and increased its euro-denominated reserves by $98 billion. The SNB’s foreign exchange reserves peaked in the second quarter of 2010 at $223 billion with purchases of $91 billion in that quarter, $72 billion of which went into euro-denominated assets. In the last two quarters of 2010, the SNB diversified its assets somewhat by selling euro denominated assets and purchasing US dollars, Japanese yen, Canadian dollars, and British pounds.

Figure 1: Swiss National Bank Reserves, in US dollars

figure 1

Figure 2 depicts the Swiss National Bank’s strong preference for euros over dollars. At the end of the fourth quarter of 2008, the euro comprised 49 percent of all Swiss reserves and the US dollar accounted for 29 percent of SNB foreign reserves. In Q4 2010, the euro comprised 55 percent of Swiss reserves while the dollar’s share decreased to 25 percent. The euro’s share increased by 6 percentage points, and the dollar’s share decreased by 4 points. The share of all of the other currencies remained about the same for the period as a whole, decreasing slightly from 21 percent to 20 percent though the Bank reduced the share of the pound in its reserves and increased the share of the Canadian dollar and other currencies.

Figure 2: Composition of Swiss National Reserves, in US dollars

figure 2

In the absence of the Swiss National Bank’s foreign exchange purchases between the end of 2008 and the end of 2010, the trend in composition of all international reserves would have reflected a relatively stable share of the dollar and euro. The hypothetical quantity shares of the dollar and the euro in international reserves without the Swiss National Bank’s additional purchases are depicted in Figures 3 and 4 in the dashed lines. I focus on quantity shares to abstract from the influence of changes in exchange rate over the period.

At the end of 2010, the dollar’s quantity share of all countries reserves less the Swiss purchases would have been 64.7 percent, in contrast with the dollar’s actual share of 63.3 percent. This is a 1.4 point difference, compared to the 3.5 percent decline shown in the COFER data. The dollar’s quantity share of advanced countries’ reserves would have been 70.7 percent, 3.0 percentage points higher than the dollar’s actual share of 67.7 percent. As Switzerland is an advanced country, the SNB’s reserve purchases and preferences have a disproportionately larger effect on the advanced countries’ dollar and euro shares of reserves. Likewise, the impact on shares of all countries’ reserves is relatively diluted.

Figure 3: Dollar Quantity Shares with and without Swiss Purchases

figure 3

At the end of 2010, the euro’s share of all countries’ reserves less Swiss purchases would have been 23.3 percent compared with the actual share of 24.5 percent. This difference of 1.3 percentage points would nearly wipe out the recorded 1.5 point increase in the euro’s share. For advanced countries, the Euro share would have been 20.0 percent instead of 22.5 percent, a difference of 2.5 points, which would eliminate a large portion of the recorded 3.3 point increase.

Figure 4: Euro Quantity Shares with and without Swiss Purchases

figure 4

The published aggregate IMF COFER data suggest a general diversification away from dollars from the end of 2008 to the end of 2010 with a significant shift toward the euro. However, a substantial portion of this apparent shift away from the dollar can be explained by the Swiss National Bank’s large-scale purchases of foreign exchange over this period combined with the Bank’s preference for euro-denominated assets. Similarly, the shift to euro-denominated assets is largely the consequence of the Swiss National Bank’s operations.

Note

1. This calculation is from a base period of Q1 1999.


Truman, Edwin M. and Anna Wong. 2006. The Case for an International Reserve Diversification Standard. Peterson Institute for International Economics Working Paper 06-2 (May). Washington: Peterson Institute for International Economics.

Allie Bagnall is a research analyst at the Peterson Institute for International Economics. She prepared this note with the assistance of Ted Truman.

Comments (0)

Leave a Comment