Misunderstanding IMF COFER Adjustments

There is a buzz from the sidelines of the foreign exchange market that the IMF is considering classifying the Australian and Canadian dollars as reserve currencies. This is a misleading way to characterize what is happening.

It is already well documented that a number of central banks, including German, Swiss, and Russian central banks have added one or both of those currencies to reserves. There can be no doubt that the Australian and Canadian dollars are minor reserve currencies.

The IMF is the most authoritative source of information about the composition of reserves. It publishes its COFER (Currency Composition of Official Foreign Exchange Reserves) at the end of every quarter, with a quarter lag in the data. It breaks out five currencies presently, US dollar, euro, sterling, yen and Swiss franc.

There is a catch-all category "other" that include the Australian and Canadian dollars. The "other" currencies have increased to 5.3% of the reserves in which the currency allocation is provided, up from 2% at the end of 2007. The Australian and Canadian dollars likely account for the bulk of this increase.

The IMF is simply considering breaking out the data for the Australian and Canadian dollar. It is technical not substantive. It does not make them more or less attractive as reserve currencies. At most, it is recognition of what central banks have already done. Their usage has reached a critical mass where it might make sense to list them separately.

What is noteworthy is what is not being considered. Despite all the talk of "currency wars" and the internationalization of the yuan, the Chinese currency has made practically no head way as a reserve currency. To the extent there has been diversification of reserves away from dollars and euros, the Australian and Canadian dollars have been the beneficiaries, much more so than China.