Column: Dollar reserves weather sanctions shock

4 minute read

U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic

Register now for FREE unlimited access to Reuters.com

LONDON, July 1 (Reuters) - 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.

Register now for FREE unlimited access to Reuters.com

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. read more

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.

Share of world reserves in different currencies
IMF chart on Q1 world reserves data

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.

UBS chart on central bank reserve survey

The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own

Register now for FREE unlimited access to Reuters.com
By Mike Dolan, Twitter: @reutersMikeD; Editing by Edmund Blair

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Thomson Reuters

Mike Dolan is Reuters Editor-at-Large for Finance & Markets and has worked as an editor, correspondent and columnist at Reuters for the past 26 years - specializing in global economics, policymaking and financial markets across the G7 and emerging economies. Mike is currently based in London, but has also worked in Washington DC and Sarajevo and has covered news events from dozens of cities across the world. A graduate in economics and politics from Trinity College Dublin, Mike previously worked with Bloomberg and Euromoney and received Reuters awards for his work during the financial crisis in 2007/2008 and on frontier markets in 2010. He was a regular Reuters columnist in the International New York Times between 2010 and 2015 and currently writes twice weekly columns for Reuters on macro markets and investing.