The IMF reports the most authoritative currency allocation of global reserves at the end of every quarter with a quarter delay. Invariably, an economist, strategist, or journalist is inspired to write why some data nugget confirms the demise of the dollar as the dominant currency. Given the unorthodox US President, his criticism of Fed policy, and desire for a weaker dollar, the protectionism, and trillion-dollar deficits, many may be predisposed to see a loss of prestige and status. Alas, the IMF’s COFER data provides no such evidence.
Let’s begin at the highest level and drill down. The first thing to note is that the reserve assets at reported in US dollars and the movement of exchange rates often as a significant impact. Overall, the value of reserves was estimated at $11.482 trillion at the end of Q2. That was a decline of $122.2 bln. Some emerging market countries experiencing downside pressure on their currencies may have intervened and experienced a decline in reserves. However, the dollar rose against all reserve currencies in Q2 (GBP -5.8%, CNY -5.2%, Euro -5%, JPY -4%, AUD -3.6%, and CAD -1.8%) and the valuation rather than quantities seems a more compelling explanation.
The IMF has two broad categories of reserves: allocated and unallocated. Not all central banks report their allocation to the IMF. Some regard this as a national secret. Other central banks are fairly transparent. One of the under-reported developments has been the dramatic decline in unallocated reserves. Consider that as of Q5 15, unallocated reserves were $4.1 trillion, roughly 40% of the overall reserves (~$10.92 trillion). By Q2 18, the unallocated reserves had fallen to $960 bln or less than 8.5% of overall reserves ($11.48 trillion).
What is happening? China is slowly reporting the allocation of its reserves as it adopts IMF best practices, perhaps linked to the Q4 2016 decision to include the yuan in the SDR and for the COFER data to break out the use of the yuan as a reserve asset. Previously, the yuan was included with the “other currencies.” Consider that PBOC reserves were reported at $3.33 trillion at the end of 2015. The dollar value of unallocated reserves has fallen by about $3.1 trillion. This suggests that Chinese reserves have nearly been fully allocated.
