The decade-long surge in foreign-currency reserves held by the world’s central banks is coming to an end.
Global reserves declined to US$11.6 trillion last month from a record US$12.03 trillion in August last year, halting a fivefold increase that began in 2004, according to data compiled by Bloomberg.
While the drop may be overstated because the strengthening US dollar reduced the value of other reserve currencies such as the euro, it still underlines a shift after central banks — with most of them located in developing nations like China and Russia — added an average US$824 billion to reserves each year over the past decade.
Beyond being emblematic of the US dollar’s return to its role as the world’s undisputed dominant currency, the drop in reserves has several potential implications for global markets. It could make it harder for emerging-market countries to boost their money supply and shore up faltering economic growth; it could add to declines in the euro; and it could dampen demand for US Treasury bonds.
“It’s a big challenge for emerging markets,” Stephen Jen, a former IMF economist who is cofounder of SLJ Macro Partners LLP in London, said by phone.
They “now need more stimulus. The seed has been sowed for future volatility,” he said.
Stripping out the effect from fluctuations in foreign exchange, Credit Suisse Group AG estimates that developing countries, which hold about two-thirds of global reserves, spent a net US$54 billion of this stash in the fourth quarter, the most since the global financial crisis in 2008.
China, the world’s largest reserve holder, together with commodity producers contributed to most of the declines, as central banks sold US dollars to offset capital outflows and shore up their currencies.
A Bloomberg gauge of emerging market currencies has lost 15 percent against the US dollar over the past year.
China cut its stockpile to US$3.8 trillion in December from a peak of US$4 trillion in June, central bank data show. Russia’s supply tumbled 25 percent over the past year to US$361 billion last month, while Saudi Arabia, the third-largest holder after China and Japan, has burned through US$10 billion in reserves since August to US$721 billion.
The trend is likely to continue as oil prices stay low and growth in emerging markets remains weak, reducing the US dollar inflows that central banks used to build reserves, Deutsche Bank AG said.
Such a development is detrimental to the euro, which had benefited from purchases in recent years by central banks seeking to diversify their reserves, said George Saravelos, co-head of foreign-exchange research at Deutsche Bank.
The euro’s share of global reserves dropped to 22 percent last year, the lowest since 2002, while the dollar’s rose to a five-year high of 63 percent, the IMF reported on Tuesday last week.
“The Middle East and China stand out as two regions that are likely to face ongoing pressures to run down reserves over the next few years,” Saravelos wrote in a note.
The central banks there “need to sell euros,” he said.
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