Dollar Dominance in the International Reserve System - Serkan Arslanalp, Barry Eichengreen , Chima Simpson-Bell (IMF blog)

 Financial markets

Dollar Dominance in the International Reserve System: An Update 

The US dollar continues to cede ground to nontraditional currencies in global foreign exchange reserves, but it remains the preeminent reserve currency

Serkan Arslanalp, Barry Eichengreen , Chima Simpson-Bell

IMF blog, June 11, 2024

https://www.imf.org/en/Blogs/Articles/2024/06/11/dollar-dominance-in-the-international-reserve-system-an-update?utm_medium=email&utm_source=govdelivery

Dollar dominance—the outsized role of the US dollar in the world economy—has been brought into focus recently as the robustness of the US economy, tighter monetary policy and heightened geopolitical risk have contributed to a higher greenback valuation. At the same time, economic fragmentation and the potential reorganization of global economic and financial activity into separate, nonoverlapping blocs could encourage some countries to use and hold other international and reserve currencies.

Recent data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) point to an ongoing gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments. Strikingly, the reduced role of the US dollar over the last two decades has not been matched by increases in the shares of the other “big four” currencies—the euro, yen, and pound. Rather, it has been accompanied by a rise in the share of what we have called nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies. The most recent data extend this trend, which we had pointed out in an earlier IMF paper and blog. 

 

These nontraditional reserve currencies are attractive to reserve managers because they provide diversification and relatively attractive yields, and because they have become increasingly easy to buy, sell and hold with the development of new digital financial technologies (such as automatic market-making and automated liquidity management systems). 

This recent trend is all the more striking given the dollar’s strength, which indicates that private investors have moved into dollar-denominated assets. Or so it would appear from the change in relative prices. At the same time, this observation is a reminder that exchange rate fluctuations can have an independent impact on the currency composition of central bank reserve portfolios. Changes in the relative values of different government securities, reflecting movements in interest rates, can similarly have an impact, although this effect will tend to be smaller, insofar as major currency bond yields generally move together. In any event, these valuation effects only reinforce the overall trend. Taking a longer view, over the last two decades, the fact that the value of the US dollar has been broadly unchanged, while the US dollar’s share of global reserves has declined, indicates that central banks have indeed been shifting gradually away from the dollar.

 

At the same time, statistical tests do not indicate an accelerating decline in the dollar’s reserve share, contrary to claims that US financial sanctions have accelerated movement away from the greenback. To be sure, it is possible, as some have argued, that the same countries that are seeking to move away from holding dollars for geopolitical reasons do not report information on the composition of their reserve portfolios to COFER. Note, however, that the 149 reporting economies make up as much as 93 percent of global FX reserves. In other words, non-reporters are only a very small share of global reserves.

One nontraditional reserve currency gaining market share is the Chinese renminbi, whose gains match a quarter of the decline in the dollar’s share. The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalization, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency. It is thus interesting to note that renminbi internationalization, at least as measured by the currency’s reserve share, shows signs of stalling out. The most recent data do not show a further increase in the renminbi’s currency share: some observers may suspect that depreciation of the renminbi exchange rate in recent quarters has disguised increases in renminbi reserve holdings. However, even adjusting for exchange rate changes confirms that the renminbi share of reserves has declined since 2022. 

Some have suggested that what we have characterized as an ongoing decline in dollar holdings and rise in the reserve share of nontraditional currencies in fact reflects the behavior of a handful of large reserve holders. Russia has geopolitical reasons to be cautious about holding dollars, while Switzerland, which accumulated reserves over the last decade, has reason to hold a large fraction of its reserves in euros, the Euro Area being its geographical neighbor and most important trading partner. But when we exclude Russia and Switzerland from the COFER aggregate, using data published by their central banks from 2007 to 2021, we find little change in the overall trend. 

In fact, this movement is quite broad. In our 2022 paper, we identified 46 “active diversifiers,” defined as countries with a share of foreign exchange reserves in nontraditional currencies of at least 5 percent at the end of 2020. These include major advanced economies and emerging markets, including most of the Group of Twenty (G20) economies. By 2023, at least three more countries (Israel, Netherlands, Seychelles) have joined this list. 

We also found that financial sanctions, when imposed in the past, induced central banks to shift their reserve portfolios modestly away from currencies, which are at risk of being frozen and redeployed, in favor of gold, which can be warehoused in the country and thus is free of sanctions risk. That work also showed that the demand for gold by central banks responded positively to global economic policy uncertainty and global geopolitical risk. These factors may lie behind the further accumulation of gold by a number of emerging market central banks. Before making too much of this trend, however, it is important to recall that gold as a share of reserves still remains historically low.

 

In sum, the international monetary and reserve system continues to evolve. The patterns we highlighted earlier—very gradual movement away from dollar dominance, and a rising role for the nontraditional currencies of small, open, well-managed economies, enabled by new digital trading technologies—remain intact.

—For more, see IMF First Deputy Managing Director Gita Gopinath’s May 7 speech: Geopolitics and its Impact on Global Trade and the Dollar.

A diretora-gerente do FMI ensina aos países como recuperar o crescimento econômico (não sei se vai dar certo) - Kristalina Georgieva (IMF Blog)

 

Dear Colleague, We just published a new blog—please find the full text below.

Three Policy Priorities for a Robust Recovery (Photo: ASIANDREAM/iStock by Getty Images) By Kristalina Georgieva

We must work together to end the pandemic, navigate monetary tightening and shift focus to fiscal sustainability. When the Group of Twenty finance ministers and central bank governors gather in Jakarta, in person and virtually, this week, they can take inspiration from the Indonesian phrase, gotong royong, “working together to achieve a common goal. This spirit is more important than ever as countries are facing a tough obstacle course this year. The good news is that the global economic recovery continues, but its pace has moderated amid high uncertainty and rising risks. Three weeks ago, we cut our global forecast to a still-healthy 4.4 percent for 2022, partly because of a reassessment of growth prospects in the United States and China. Since then, economic indicators have continued to point to weaker growth momentum, due to the Omicron variant and persistent supply chain disruptions. Inflation readings have been higher than expected in many economies; financial markets remain volatile; and geopolitical tensions have sharply increased. That is why we need strong international cooperation and extraordinary agility. For most countries, this means continuing to support growth and employment while keeping inflation under control and maintaining financial stability—all in the context of high debt levels. Our new report to the G20 shows just how complex this obstacle course is and what policymakers can do to get through it. Let me highlight three priorities: First, we need broader efforts to fight ‘economic long-Covid’ We project cumulative global output losses from the pandemic of nearly $13.8 trillion through 2024. Omicron is the latest reminder that a durable and inclusive recovery is impossible while the pandemic continues. But considerable uncertainty remains about the path of the virus post-Omicron, including the durability of protection offered by vaccines or prior infections, and the risk of new variants. In this environment, our best defense is to move from a singular focus on vaccines to ensuring each country has equitable access to a comprehensive COVID-19 toolkit with vaccines, tests, and treatments. Keeping these tools updated as the virus evolves will require ongoing investments in medical research, disease surveillance, and health systems that reach the “last mile” into every community. Upfront financing of $23.4 billion to close the ACT-Accelerator funding gap will be an important down payment on distributing this dynamic toolkit everywhere. Going forward, enhanced coordination between G20 finance and health ministries is essential to increasing resilience—both to potential new SARS-CoV-2 variants, and future pandemics that could pose systemic risks. Ending the pandemic will also help address the scars from economic long-COVID. Think of the profound disruptions in many businesses and labor markets. And think of the cost to students worldwide, estimated at up to $17 trillion over their lives due to learning losses, lower productivity, and employment disruptions. School closures have been especially acute for students in emerging economies where educational attainment was much lower to begin with—threatening to compound the dangerous divergence among countries. What can be done? Strong policy action. Scaling up social spending, reskilling programs, remedial training for teachers and tutoring for students will help economies get back on track and build resilience to future health and economic challenges. Second, countries need to navigate the monetary tightening cycle While there is significant differentiation across economies and high uncertainty going forward, inflation pressures have been building in many countries, calling for a withdrawal of monetary accommodation where necessary. Going forward, it is important to calibrate policies to country circumstances. It means withdrawal of monetary accommodation in countries such as the United States and the United Kingdom, where labor markets are tight and inflation expectations are rising. Others, including the euro area, can afford to act more slowly, especially if the rise in inflation relates largely to energy prices. But they, too, should be ready to act if economic data warrants a faster policy pivot. Of course, clear communication of any shift remains essential to safeguard financial stability at home and abroad. Some emerging and developing economies have already been forced to combat inflation by raising interest rates. And the policy pivot in advanced economies may require additional tightening across a wider range of nations. This would sharpen the already difficult trade-off countries face in taming inflation while supporting growth and employment. So far, global financial conditions have remained relatively favorable, partly because of negative real interest rates in most G20 countries. But if these financial conditions tighten suddenly, emerging and developing countries must be ready for potential capital flow reversals. To prepare for this, borrowers should extend debt maturities where feasible now , while containing a further buildup of foreign currency debts. When shocks do come, flexible exchange rates are important for absorbing them, in most cases, but they are not the only tool available. In the event of high volatility, foreign exchange interventions may be appropriate, as Indonesia successfully did in 2020. Capital flow management measures may also be sensible in times of economic or financial crisis: think of Iceland in 2008 and Cyprus in 2013. And countries can take macroprudential measures to guard against risks in the non-bank financial sector or where property markets are surging. Of course, all these measures may still need to be combined with macroeconomic adjustments. In other words, we need to ensure that all countries can move safely through the monetary tightening cycle. Third, countries need to shift their focus to fiscal sustainability As countries emerge from the grip of the pandemic, they need to carefully calibrate their fiscal policies. It’s easy to see why: extraordinary fiscal measures helped prevent another Great Depression, but they have also pushed up debt levels. In 2020, we observed the largest one-year debt surge since the second world war, with global debt—both public and private—rising to $226 trillion. For many countries, this means ensuring continued support for health systems and the most vulnerable, while reducing deficits and debt levels to meet their specific needs. For example, a faster scaling back of fiscal support is warranted in countries where the recovery is further ahead. This in turn will facilitate their shift in monetary policy by reducing demand and thus helping to contain inflationary pressures. Others, especially in the developing world, face far more difficult trade-offs. Their fiscal firepower has been scarce throughout the crisis, which has left them with weaker recoveries and deeper scars from economic long-Covid. And they have little scope to prepare for a post-pandemic economy that is greener and more digital. For example, the IMF last year described how green supply policies, including a 10-year public investment program, could raise annual global output by about 2 percent compared to the baseline on average over 2021-30. All these policy actions can help us find a new modus vivendi for a more shock-prone world. But they may be hampered by debt. We estimate that about 60 percent of low-income countries are in or at high risk of debt distress, double 2015 levels. These and many other economies will need more domestic revenue mobilization, more grants and concessional financing, and more help to deal with debt immediately. That includes reinvigorating the G-20 Common Framework for debt treatment. This should start with offering a standstill on debt service payments during the negotiation under the framework. Quicker and more efficient processes are needed, with clarity on the steps to go through, so that everyone knows the road ahead—from formation of creditor committees to an agreement on debt resolution. And make the framework available to a wider range of highly indebted countries. The IMF’s role The IMF plays an important role in this area by providing macroeconomic frameworks and debt sustainability analyses. And we encourage greater debt transparency: by requesting greater disclosure of what a member country owes and to whom when it seeks IMF financing, and by working with our members through the IMF-World Bank Multi-Pronged Approach to debt vulnerability. We also need to build on the historic allocation of Special Drawing Rights of $650 billion. As well as holding the new SDRs as reserves, some members have already begun to put them to good use. For example: Nepal for vaccine imports; North Macedonia for health spending and pandemic lifelines; and Senegal to boost vaccine production capacity. To magnify the impact of the allocation, we encourage channeling of new SDRs through our Poverty Reduction and Growth Trust, which provides concessional financing to low-income countries, and the new Resilience and Sustainability Trust. With its cheaper rates and longer maturities, the RST could fund climate, pandemic preparedness, and digitalization policies that would improve macroeconomic stability for decades to come. The G20 has given its strong backing to the RST, and we aim to have it fully operational this year. As countries face up to multiple challenges, the IMF will support them with calibrated policy advice, capacity development, and financial assistance where needed. The key is to bring agility into all aspects of policymaking—but even that is not enough. We also need to follow the spirit of Indonesia’s motto, Bhinneka Tunggal Ika—”Unity in Diversity.” Together we can get through the obstacle course to a durable recovery that works for all.

Latin America and a Food Price Shock - IMF blog

Latin America and the Caribbean: Dealing with Another Food Price Shock

IMF blog, October 25, 2012 by iMFdirect

By Luis Cubeddu and Sebastián Sosa

World food prices are on the rise again owing mainly to global weather-related shocks. This has led to concern that the rise could result in higher inflation and hurt the most vulnerable.

Two points to note are that the recent increase in food prices has been less acute than the two previous episodes (in mid-2008 and early 2011), and features differences across commodities. For example, while the price ofsoybeans, corn andwheat are up sharply, coffee and sugar prices are down. Market projections suggest that corn, soy, and wheat prices will stay high through end-2012, but then decline gradually as supply conditions normalize.

Watching out for inflation

The impact on domestic inflation in Latin America and the Caribbean of the latest food price shock is beginning to be felt, although the pass-through to core (or underlying) inflation has been relatively limited thus far.

Monetary authorities need to remain vigilant, however, as the impact of global food price shocks on inflation and inflation expectations can be significant, and often operate with a lag.

Countries with weaker monetary policy frameworks should be particularly alert and be ready to act decisively in view of their historically high pass-through from global to domestic food prices, and from domestic food prices to core inflation (for more detail, see our previous research).

Wage restraint will be required in countries with pegged exchange rate regimes or dollarized economies.

Uneven impact

The impact on the balance of payments of the higher food prices is also likely to differ across the region. While Southern Cone countries (which export soybeans, corn, and wheat) stand to benefit the most from the recent spike in food prices, the Caribbean, a large food importer, stands the most to lose.

Central America also will be adversely affected even though it is a net food exporter, because it imports corn and wheat (whose prices have risen) and exports coffee and sugar (whose prices have declined). Thesefood price trends are adding to the external imbalances in the Caribbean and Central America, which have been affected by high energy prices for several years.

Protecting the poor

Policies to protect the poor, which tend to spend a larger share of their income on food, will need to be accommodated within tight budgets.

Countries that need to reduce public debt (the Caribbean) or regain policy space (Central America) will have to adopt those policies while keeping overall spending at a sustainable level.

Countries operating near potential (South America’s commodity exporters) would have to reallocate spending from other areas to income support for the poor to keep fiscal positions in check.

Countries could scale up well-targeted social safety net programs(while avoiding generalized price subsidies), and reduce taxes/tariffs on food items temporarily (while avoiding export taxes/restrictions as they generally distort production incentives and are difficult to unwind). Supply-side policies could be also considered to encourage food production (for example, subsidies on fertilizers and seeds), although these should be limited to clear cases of market failure in the agricultural sector.