The decade-long surge in foreign currency reserves held by the world’s central banks is coming to an end.
Global reserves declined to $11.6trn (€10.52trn) in March from a record $12.03trn last August, halting a five-fold increase that began in 2004, according to data compiled by Bloomberg.
While the drop may be overstated because the strengthening dollar reduced the value of other reserve currencies such as the euro, it still underlines a shift after central banks added an average $824bn to reserves each year over the past decade.
Beyond being emblematic of the 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.
Stripping out the effect from foreign-exchange fluctuations, Credit Suisse Group estimates developing countries, which hold about two thirds of global reserves, spent a net $54bn of this stash in the fourth quarter, the most since the global financial crisis in 2008.
China, the world’s largest reserve holder, and commodity producers contributed to most of the declines, as central banks sold dollars to offset capital outflows and shore up their currencies.
China cut its stockpile to $3.8trn in December from a peak of $4trn in June, central bank data show. Russia’s supply tumbled 25% over the past year to $361bn in March, while Saudi Arabia, the third largest holder after China and Japan, has burned through $10bn in reserves since August to $721bn.
The trend is likely to continue as oil prices stay low and growth in emerging markets remains weak, reducing the dollar inflows that central banks used to build reserves.
Such a development is detrimental to the euro, which had benefited from purchases in recent years by central banks seeking to diversify their reserves, according to George Saravelos, co-head of foreign-exchange research at Deutsche Bank.
The euro’s share of global reserves dropped to 22% in 2014, the lowest since 2002, while the dollar’s rose to a five-year high of 63%, the IMF reported on March 31.
The euro has declined against 29 out of 31 major currencies this year as the ECB stepped up stimulus to avert deflation. The euro tumbled to a 12-year low of $1.0458 on March 16.
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