MENAFN - Arab News
Is dollar still the reserve currency of choice?
(MENAFN - Arab News) JEDDAH: The US dollar will unlikely to lose its status as the main reserve currency in the near future despite the current challenges facing the US economy, regional economists said yesterday.
According to the International Monetary Fund data, the dollar's share of known global reserves held by central banks slipped in the year's second quarter.
The dollar's share of the roughly 5.8 trillion of known reserves was 61.9 percent in the second quarter compared with 62.1 percent during the first three months of the year, Reuters reported.
Fahad Alturki, senior economist at the Riyadh-based Jadwa Investment, said: "It is less likely that the dollar will lose its status as the main reserve currency in the near future despite the current challenges facing the US economy. Of course challenges such as persistent current account deficits and growing foreign public debt are expected to dent the dollar's status as a reserve currency in the short-term but it will not eliminate it mainly due to lack of an attractive alternative that would match the long-term strength, stability, depth and liquidity of the dollar."
However, Alturki added: "While the euro has made the second largest share in global reserves after the dollar, the EU policymakers' current handling of the structural issues facing member countries is likely to limit the potential rise of the euro as a reserve currency."
In addition, he pointed out that international trade of the main commodities is conducted in dollar, which naturally leaves it as the main reserve currency of choice.
When asked whether the dollar is still the reserve currency of choice, Jarmo T. Kotilaine, a regional economist, said: "I think we can safely say that it is. Its standing may not be quite as unequivocal or uncontested as before but the latest data highlights the reality that there are no real alternatives for the dollar with the partial exception of the euro."
He said whatever erosion we see in the dollar's standing is basically insignificant. If anything, the heightened global risk aversion has probably caused many erstwhile skeptics to turn back to the 'devil they know.'
Total global central bank holdings, including currencies not specified, rose to a record of more than 10.5 trillion, Reuters said.
Despite the euro zone debt crisis, the euro's share of global reserves increased to 25 percent from 24.9 percent in the first quarter. The central banks' allocation to euros increased by 45.5 billion in the second quarter, the IMF data showed.
In 1999 the euro had an 18 percent share of reserves, which peaked at 28 percent in 2009 and has stabilized around 25 percent. One notable trend was the reduction of euro exposure by emerging market central banks by about 4 percent to 695 billion from 723 billion in the first quarter.
"The US dollar is still the "reserve currency of choice" in spite of slight dip of its share. As for the euro and despite its debt crisis, it is still maintaining its share in global ranking in reserves. Having said that, emerging markets have slowed their reliance on the euro as a reserve currency," according to Basil Al-Ghalayini, CEO of BMG Financial Group.
But Kotilaine said: "I don't think that the data suggests that the share of other currencies is on the rise in global reserves, even on the margin. "The euro has naturally been tested by the euro-zone crisis, although even its resilience highlights the relative absence of alternatives. The reality is that there are precious few globally traded, freely floating currencies supported by deep financial markets," he added.
According to Kotilaine, the euro is clearly the only real alternative to the dollar, even if it is lagging far behind. The euro-zone crisis will complicate the euro's emergence as an equal alternative. Indeed the current position could even be further eroded should the situation in the euro-zone further deteriorate. "But the challenge for reserve managers around the world is that they are now left allocating the lion's share of their assets between the two challenged currencies with no sign of more credible alternatives to go to. The global currency system is being tested as never before but this aspect of its foundations stands firm," Kotilaine said.
Another noteworthy trend, according to Reuters report, was in the category of "other currencies," which mainly means commodity-linked currencies, such as the Australian and Canadian dollars.
Their share of overall currency reserves grew to 5.3 percent of the total in the second quarter from around 5.2 percent in the first three months of the year.
However, Asim Bukhtiar, vice president and head of research at Riyad Capital, said: "Some viable alternative to the dollar must emerge to displace the greenback from the reserve currency status and sustained declines in dollar holdings by the global central banks' need to occur to establish a trend. Having said this, diversification is prudent which is driving the foray into alternative holdings and currencies."
Interestingly, he said: "In times of volatility and uncertainty, the flight to quality is expected, which so far appears to be dollar-linked assets, namely equities and bonds. While the euro was projected as the counter-weight to the dollar, the ongoing debt crisis in Europe has cast doubt on the future of the single currency. Similarly, the Japanese yen, which is currently enjoying a safe haven status, has had its share of turbulence in the past. And the same could be said about commodity-linked currencies such as the Canadian loonie and Aussie dollar."
The bottom line is that the US dollar has been tried and tested through economic cycles and contagions, which contributes to its appeal as the reserve currency, Bukhtiar added.
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