De-dollarization - The End of the U.S. Dollar's Dominance

At the recent Russian Energy Week meeting held in Moscow from October 2nd to 5th, 2019 Russian President Vladimir Putin made some very interesting comments about the changing role of the United States dollar as the world's foremost reserve currency during a panel discussion.  Let's look at some background information on the world's reserve currencies followed by quotes from President Putin's commentary and how Russia is handling its affairs in light of the potential tectonic shift in global reserve currencies.

According to Philosophy of Metrics, the history of the world's reserve currencies since the 15th century and their duration are as follows:

Portugal - 1450 to 1530 (80 years)

Spain - 1530 to 1640 (110 years)

Holland  - 1640 to 1720 (80 years)

France - 1720 to 1815 (95 years)

United Kingdom - 1815 to 1920 (105 years)

United States - 1920 to 2030 (estimated) (110 years)

As you can see, the United States dollar has now reigned as the world's foremost reserve currency for longer than most other currencies.

The United States dollar ascended to the throne in 1914 when the first U.S. dollar as it is known today was printed; this took place shortly after the creation of the Federal Reserve Bank under the Federal Reserve Act of 1913.  It was during the First World War that many nations had to abandon the gold standard in order to pay their military expenses using paper (fiat) currencies.  Even the United Kingdom which had clung to the gold standard to maintain its position as the world's reserve currency of choice had to abandon the gold standard in order to borrow money to fund its military.  In 1944, a meeting of 44 Allied nations in Bretton Wood, New Hampshire, negotiated a new system of foreign exchange.  In this new system known as the Bretton Wood Agreement, central banks would maintain fixed exchange rates between the currencies of their nation and the U.S. dollar.  In turn, the United States would redeem the American dollar for gold upon demand of their allies.  It was at this point that the U.S. dollar was officially declared the world's reserve currency, largely because it was backed by the world's largest gold reserves.

Here is a table from the International Monetary Fund showing the currency composition of the official foreign exchange reserves for the entire world, showing the dominance of the United States dollar:

Here are both a pie chart and bar graph showing the same information:

As of the second quarter of 2019, $6.792 trillion or 57.9 percent of the world's total foreign exchange reserves are held in United States dollars.

Now, let's look at the comments made by President Vladimir Putin in October 2019 about the United States dollar and its historical and future roles:

"The dollar enjoyed great trust around the world.  It was almost the only universal currency in the world.  For some reason, the United States began to use dollar settlements asa tool for political struggle.  Imposing restrictions on the use of the dollars.  They began to fight the hand that feeds them.  They'll collapse soon.  Many countries in the world began turning away from using the dollar as a reserve currency.  They restrict Iran in its dollar settlements.  They impose some restrictions on Russia and other countries.  This undermines confidence in the dollar.  Isn't it clear?  They are destroying the dollar with their own hands."

  

Let's look at some examples of how Russia and China are working around the United States dollar.  Back in September 2019, the South China Morning Post announced this:

In July 2019, the Moscow Times announced this:

Here is a graphic showing Russia's growing gold reserves:

Just for interest's sake, here is a graphic showing China's growing gold reserves:

Let's close with this graphic showing the significant readjustment in China's U.S. dollar foreign exchange reserves from 2014 to 2017:

In conclusion, while Vladimir Putin's opinion on the United States dollar as the world's reserve currency may be nothing more than wishful thinking, it is clear that both Russia and China, the world's second largest economy and likely inheritor of the global superpower "crown" are taking significant steps to protect themselves from the possibility of a tectonic shift in the global monetary reserve reality.  Given Washington's penchant for using economic warfare as part of its efforts to retain its dominant status in the global village, one could easily see why nations would elect to insure themselves against such economic bullying.

The United States Dollar - Too Big to Fail?

Updated February 6th, 2014

Now that another brush with "debt death" has passed, the world's economy is breathing a sigh of relief. With the United States dollar being the world's foremost currency, what happens in America definitely doesn't stay in America.  That's the danger of having a fiat currency as a reserve!

That said, how much of the world's total foreign exchange reserves is held in U.S. dollars and how has that changed with time?   Fortunately for us, the IMF keeps track of this data in its Currency Composition of Official Foreign Exchange Reserves (COFER) database.  The currencies that it keeps track of are the U.S. dollar, the Canadian dollar, the pound stirling, the Japanese yen, the Swiss franc, the Euro and the Australian dollar.  The IMF does not release data for the reserve composition of individual countries since that is considered confidential.

Foreign exchange reserves include foreign banknotes, bank deposits, short and long-term government securities and treasury bills but do not include reserves held by the country of issue (i.e. the euro assets of the ECB are not included nor are the U.S. dollar assets held by the Federal Reserve).

Let's open with a graph showing the rather impressive growth in both allocated and unallocated foreign exchange reserves since 1999:

Unallocated reserves refer to the foreign exchange holdings of countries that report their reserves to the International Financial Statistics World Tables database but not to COFER.

Here is a graph showing the growth in the total allocated foreign exchange reserves since 1999:

Total allocated foreign reserves grew from $1.035 trillion at the beginning of 1999 to $6.191 trillion in the third quarter of 2013, an increase of 498 percent.

Now, let's look at a graph showing the growth in the number of United States dollars held in foreign exchange reserves since 1999:

Total U.S. dollars held rose from $882.3 billion at the beginning of 1999 to $3.803 trillion in the third quarter of 2013, an increase of 331 percent.  Of the total United States dollars held in foreign reserves by advanced economies, $2.076 trillion or 54.6 percent are held by the world's advanced economies.  The remaining $1.728 trillion is held by the world's emerging economies.

Notice that the increase in total foreign reserves is substantially higher than the increase in U.S. dollar holdings in those reserves?

Lastly, lets look at how the percentage of total allocated foreign reserves held in U.S. dollars has changed since 1999 as shown on this line graph:

Back in 1999 and 2001, between 71 and 73 percent of foreign reserves around the world were held in United States dollars.  This level began to drop in 2002 and has steadily dropped to its current level of 61.9 percent.  While the total value of U.S. dollars held in foreign reserves has risen by 320 percent since 1999, the proportion of those reserves has dropped by 15 percent.

Of the total United States dollars held in foreign reserves, $3.669 trillion or 97.6 percent are held by the world's advanced economies.  The remaining relatively insignificant amount is held by the world's emerging economies.

While the United States dollar is viewed as being "too big to fail", this data shows us that the importance of the USD as a reserve currency has declined to a rather substantial degree.  With the recent shenanigans in Washington, perhaps the world is becoming a bit wiser when it comes to relying on a single fiat currency as its primary reserve.

Ah, fiat currencies.  Where would we be without them?

  

China's Holdings of U.S. Treasuries - What Does The Future Hold?

We are all aware that China has massive foreign exchange reserves; at the end of December 2011, China held a total of $3.181 trillion in various currencies, mainly in United States Treasuries.  The exact composition of China's foreign reserves is a great mystery, however, the Treasury Department report that I'm using for this posting is the most reliable source for the U.S. allocation of the total.  In recent weeks, the Eurozone debtor nations have been approaching China to invest in their rather toxic stew of sovereign debt, however, the outside world has no way of knowing whether they have actually accepted Europe's kind offer.

Here is a chart showing the data that I will be using for this posting sourced from the United States Treasury Department for historical data and from here for last year's data and from the Chinability website:

The Treasury Department releases a monthly summary of Major Foreign Holders of Treasury Securities showing which nations are holding U.S. Treasuries.  From that data, we can see how the holding of Treasuries by various countries has varied over time; for example, Japan was the largest holder of Treasuries between the years 2000 ($317.7 billion) and September of 2008 ($617.5 billion) when they were supplanted by China who held $618.2 billion in that month.  Since then, China has been the number one holder of U.S. Treasuries.

Here is a graph showing the growth of China's foreign exchange reserves since 2000:

Here is a graph showing the annual percentage growth of China's foreign exchange reserves since 2000:

Now, here is a graph showing the annual percentage growth of China's holdings of United States Treasuries:

Note that China's holdings of Treasuries in 2011 actually dropped by 0.71 percent despite the fact that their overall foreign reserves holdings grew by 10.49 percent.  United States holdings remained at roughly the same level at the end of 2011 as they were at the beginning; what is interesting to see is how the holdings rose and then dropped during the year as shown here:

China's holdings of Treasuries peaked at $1.3149 trillion in July of 2011 and then fell to the year end value of $1.1519 trillion by the end of December of 2011, a drop of 12.4 percent.

It is interesting to note that this drop in U.S. holdings occurred during the Eurozone debt crisis.  This would suggest that perhaps the Chinese were involved in the purchase of Eurozone debt.  It's also interesting to see that China's holdings of U.S Treasuries dropped after their Dagong Credit ratings agency warned about the level of U.S. debt as shown here.

It will be interesting to see if China continues to diversify its holdings and see if these changes in the demand for Treasuries ultimately puts upward pressure on interest rates.