US dollar to maintain dominance over next decade, say central banks

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The dollar will maintain its position as the world’s dominant reserve currency over the next decade, confounding growing calls from some countries for the adoption of alternatives, according to a closely watched annual survey of central banks.

Research by the Official Monetary and Financial Institutions Forum (OMFIF), a UK central banking think-tank, found that reserve banks managing close to a combined $5tn of assets expect the dollar to continue to decline as a proportion of global reserves at a “gradual” pace. However, it will still account for 54 per cent of the total in 10 years’ time, compared with 58 per cent currently, the survey found. 

Reserve currencies are foreign assets held in large quantities by central banks for international payments and to support local currencies.

Among those trying to challenge the dollar’s hegemony is Brazil’s president Luiz Inácio Lula da Silva, who called for emerging markets to review their reliance on the greenback at a summit in Paris last week. South Africa’s president Cyril Ramaphosa said “the issue of currency” would be “on the agenda” for the upcoming meeting of Brics countries in August, which also includes Russia, India and China.

The dominance of the dollar has gradually declined in recent decades as the role of the US in global trade has waned, while the freezing of over $300bn worth of Russian central bank assets last year sparked fresh calls among some of the world’s largest emerging economies to shift away from the US currency. At the turn of the century the dollar accounted for more than 70 per cent of global reserves, according to IMF data.

“The sense of de-dollarisation is in line with the historic trend over the last ten years,” said Nikhil Sanghani, managing director at OMFIF. “Reserve managers are telling us there’s unlikely to be a major trend from that path.” 

The OMFIF survey found that 16 per cent of reserve banks planned to increase US dollar exposure in the next couple of years, compared with 10 per cent that planned to reduce it. 

However, over the next 10 years, a net 6 per cent of reserve banks said they expected to reduce their dollar holdings.

China, the world’s largest reserve asset holder, has been pushing for greater adoption of its currency by other countries. But Sanghani said the sanctions on Russia had brought the issue of geopolitics into “sharper focus” and some reserve managers “will be looking at US tensions with China and be reluctant to invest in China right now”.

The study found just 13 per cent of respondents said they expected to increase holdings in China’s currency, down from more than 30 per cent last year. 

However, on a 10-year horizon, two-fifths of central banks expected to add to their renminbi holdings, forecasting that its share of global reserves would grow from about 3 per cent to 6 per cent by 2033. 

“Reserve managers are saying that in 10 years we want to move in that direction but now is not the time to do it,” Sanghani said.

OMFIF’s study found that the euro was likely to be the biggest beneficiary of the trend away from the dollar and cooling sentiment on China. 

The euro currently accounts for about 23 per cent of global reserves, but a net 14 per cent of central banks said they planned to increase their euro holdings over the next two years. That was ahead of demand for any other currency, and marked a big increase from last year when no banks had considered boosting euro reserves. 

Meanwhile, the survey also found that not one of the 75 central banks expected inflation to return to 2 per cent in the next 12 to 24 months.

“Reserve managers have little confidence that their colleagues on monetary policy committees will get inflation under control,” the report said.

Just over half of the central banks expected inflation to remain stuck between 2 per cent and 4 per cent, while 48 per cent thought inflation would be between 4 per cent and 6 per cent.

Additional reporting by George Steer