"The reports of my death are greatly exaggerated."
- The text of a cable sent by Mark Twain from London to the press in the United States after his obituary had been mistakenly published.
The reports of the U.S. dollar's death are greatly exaggerated. While both newspapers and bloggers wrote reams upon reams of columns over the last four years declaring the premature death of the U.S. dollar (because of high deficits, China switching to a basket of currencies to determine the value of the yuan, and Middle Eastern nations trading more and more in euros) practically no one seems to have actually bothered looking up how much the share of the U.S. Dollar as a foreign reserve currency has changed over the years. Most popular sources showed reserve currency percentages only since the euro was created and did not show numbers from any other decade (not even the 1990s). When I found the actual historical numbers, I completely flip-flopped my previous negative opinions concerning the global strength of the dollar. (By the way, although China has switched to a basket of currencies recently, it has not, and likely will not, announce the weightings of individual currencies in the basket. My guess is that the U.S. dollar is likely overweighted.)
So, the next time you hear or read Chicken Littles panicking over hearsay reports declaring that China or Europe or Iran is dumping its dollars, keep the following chart in mind. The table is from a January 2006 paper coauthored by R. Rajan(George Mason University) & Jose Kiran (National University of Singapore) called "Will the Greenback Remain the World's Currency".
(Click on table for larger image)
And if numbers from 1967 to 2003 above are not enough historical evidence, here's another table from Rajan & Kiran's paper, which provides numbers of the strength of sterling as reserve currency in 1899 (at perhaps the height of the British empire) and in 1913 (before Britain incurred huge debts during World War I).
(Click on table for larger image)
And for good measure, here is a table with current numbers from 1995 through 2006 from wikipedia which cites figures from the IMF and ECB.
(Click on table for larger image)
Excerpts (slightly edited) from my "flip-flop" post, which includes excerpts from the Rajan & Kiran paper:
Turns out from a historical perspective, THERE HASN'T BEEN A HISTORICAL WORLDWIDE SHIFT AWAY (OR TO) US Dollars or US Assets, not really, as long as you shift from the media's 5-year timeframe to a 10+ year timeframe. Over the past 40 years, the world's US Dollar Reserves have flucuated A LOT HIGHER (early 1970s) as well as A LOT LOWER (1990) than now.
The mainstream media has been hyping "the sky is falling" dollar crises for a while now. But has anybody seen a chart of the percentages of WORLD'S FOREIGN EXCHANGE RESERVES BY CURRENCY that is more than 5 years in length (not just since the Euro's creation)? Wikipedia has one type of chart from 1995 to 2006 http://en.wikipedia.org/wiki/Reserve_currency , that has the US dollar's percentage as reserve currency in 1995 A LOT LOWER THAN THAT FOR EVERY YEAR AFTERWARD.
A much better discussion, with discussion of a much longer timeline (20th century, with a chart with data going back to 1965) of the change in dominant reserve currency is in a 10-page paper (+ charts) coauthored by R. Rajan(George Mason University) & Jose Kiran (National U. of Singapore) called "Will the Greenback Remain the World's Currency", January 2006. http://www.freewebs.com/rrajan1/Reserves.pdf
Excerpts from the Rajan & Kiran paper:
Quote: Prior to World War I, Britain was the world’s leading trading nation, and around 60 percent of world trade was invoiced and settled in Pound sterling. London was alsothe undisputed financial capital of the world, and, as a result, the sterling was the logical invoicing currency for debt securities and other financial instruments.
...
The sterling’s share in foreign exchange holdings of official institutions stood at 64 percent in 1899, more than twice the total of its nearest competitors, the French franc and the Deutsche mark (Table 1), and much greater than the US dollar (USD)
...
The Bretton Woods system of pegged exchange rate centering on the USD
which was put in place in the mid 1940s consolidated the position of the USD as the world’s reserve currency in the postwar period. The USD’s share of world’s reserves peaked at almost 85 percent in the early 1970s. In contrast, the sterling’s share continued to drop dramatically following the successive devaluations of the sterling in the 1950s and 1960s. Despite the collapse of the Bretton Woods system in 1971, the USD remained the dominant international currency, though its share in global reserves began to decline, reaching a trough of 50 percent in 1990, only to bounce back to about 60 percent since the late 1990s (Table 2).
...
A study of the currency composition of global reserves in the 1970s, 1980s and 1990s arrives at the following conclusion:we do not detect radical shifts in the currency composition of reserves over time. The choice of reserve asset by developing countries continues
to be influenced by a dense web of exchange rate, financial and
commercial links with the reserve-currency countries, which itself
continues to develop gradually over time. To be sure, there are ongoing
changes in these relationships and policies…(b)ut these are evolutionary
processes, which again suggests that the currency composition of
reserves will change gradually, not discontinuously. There are plenty of
potential sources of instability affecting exchange rates and the international monetary system. But…instability in the demand for reserves
seems unlikely to be one of them.
...
As noted by an analyst from Morgan Stanley:
(A)s central banks shift from a traditional liquidity management posture to
a return-enhancing investment strategy, reserve diversification..does not
necessarily mean USD selling or USD weakness…The US corporate
bond market accounts for close to three times the corporate bond market
in euroland, and 3.5 times as big as in Japan. In fact, this market is
bigger than the other corporate bond markets combined. Similarly, the
total market cap of the US equity market is dominant, 2.5-3 times bigger
than the markets in euroland or Japan. Therefore, as central banks
diversify across assets, there is greater justification to increase their
exposure to USD risky assets…Thus, if central banks diversify…it is far from clear it will be USD-negative.
This post was last edited 11/30/2007 at 8:21 P.M.
