Latest Reserve Composition Data

The most authoritative source for data on the currency allocation of central bank reserves comes from the IMF and it is reported at the end of a quarter for the preceeding quarter. At the end of last week the IMF published Q3 reserve data.

Central banks held $7.5 trillion in reserves at the end of Q3 a $334 bln rise over the quarter and a $446 bln increase from Q3 08. Of this amount, the currency allocation of $4.43 trillion is know, leaving $3.08 trillion unallocated. There are two entities that appear to account for the bulk of the unallocated reserves. China is widely believed not to report the allocation of its reserves. At the end of Q3, China reported that its reserves stood at $2.27 trillion. Only countries are members of the IMF (unlike other international organizations like the WTO, for example) and Taiwan is not country. At the end of Q3, Taiwan reported reserves of $332 bln. These two then can account for a little more than 85% of the unallocated reserves.

The dollar's share of allocated reserves slipped to 61.6% from 62.8% in Q2. The euro's share edged higher to 27.7% from 27.4%. Sterling share was essentially flat at 4.3%, while the yen's share nudged higher to 3.2% from 3.1%. Of note, what the IMF called "other currencies" saw their share of allocated reserves rise to 2.9% from 2.2%. The bulk of this shift is expected to be accounted for by the Australian and Canadian dollars, which incidentally, Russia has indicated it was looking at for reserve purposes.

Although it is tempting to simply extrapolate from the percentage shifts to the diversification argument, it is important to recognize the important role of valuation. There are two key channels that valuation has an impact. First the currencies themselves move. By the IMF's calculation, the euro rose about 3.5% and the yen appreciated by 6.5%, while sterling fell 2.75%. Note that if a central bank held its reserves equally in euros and dollars and over the period the dollar depreciated, it would look as if the central bank diversified into euros although they did not sell a single dollar.

Second, the instruments the reserves are held in may change in price as well. It is more difficult to assess the impact of valuation shifts of these fixed income instruments, though bond markets in the euro zone, US, UK, and Japan appeared to have been firmer.

Looking at the raw dollar figures directly, dollar holdings rose by $52 bln, euro holdings (in dollars) rose by $60 bln, sterling (in dollars) rose by $8.8 bln, and yen holdings (in dollars) rose by $10.7 bln. The "other" currency holdings (in dollars) rose by $34.2 bln, more than sterling and yen combined.

The unallocated reserves rose by $168.1 bln. China and Taiwan reserves combined rose by almost $156 bln in Q3. Allocated reserves rose by $165.5 bln.

The IMF also breaks down the data in terms of advanced economies and developing economies. For numerous reasons, developing countries have long held more reserves than the advanced economies. In Q3 09, the split was $4.84 trillion held by developing and $2.67 trillion held by the advanced countries. The dollar's share of the allocated reserves of the advanced countries stood at 65.4% in Q3 2009 compared with 67.5% in Q3 2008. The euro's share stood at 25.5% in Q3 2009 compared with 22.5% in Q3 2008. Sterling share stood at 2.8% compared with 3.3% and the yen's share rose to 4.4% from 4.2%. Other currencies accounted for 2.7% of the advanced countries reserves in Q3 2009 compared with 2.5% in Q3 08. About 1/8 of the reserves of the advanced countries or $332 bln are unallocated.

Among the developing countries, the unallocated share stands at about 57%, making generalizations about their reserves weaker. Of the 43% of their reserves that are allocated, 57.5% are in dollars, down from 61.6% in Q3 2008. The euro's share stood at 31.4% up from 28.6% in Q3 2008. The category of "other currencies" account for 3.1% of the allocated reserves of developing countries, up from 1.7% in Q3 2008.

On balance, over the last couple of quarters it looks as if some diversification of reserves is indeed taking place, though it seems largely marginal, when valuation adjustments are made. We would also emphasize the non-zero sum nature of reserve accumulation: central banks are accumulating more euros, sterling, yen, other currencies, AND the dollar. In addition, the decline of the dollar appears to have flattered reserve growth when measured in dollars. This means that when the dollar recovers, it will dampen the growth rate of reserves.

That said, one of the "lessons" of the crisis is that the liquidity preference has increased for a number of economic actors, households, business, and sovereigns. Prior to the crisis, there was some debate about the over accumulation of reserves by some central banks, but on this side of the crisis, central banks are likely to hold more reserves rather than less.

Lastly, just as the diversification of European central banks away from gold did not stand in the way of the gold rally, the minor diversification of reserves away from the dollar does not pose an insurmountable obstacle to a dollar recovery, which we continue to anticipate to begin in earnest later this year.