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Elevated interest rates spur demand, despite calls from some countries to move away from US currency

The number of central banks seeking to increase their exposure to the US dollar has increased sharply this year, according to a closely watched annual survey, confounding calls from some developing countries to use rival currencies as reserves.

A net 18 per cent of global central banks plan to increase their allocation to the dollar over the next one to two years in response to US interest rates remaining high, according to the Official Monetary and Financial Institutions Forum, a UK think-tank, which surveyed 73 such institutions managing a total of $5.4tn of international reserves. The move marks a sharp rise from a net 6 per cent a year ago.

At the same time, demand for the renminbi has stalled among central banks, halting a trend of recent years when more central banks had aimed to add exposure to the Chinese currency.

A surge in dollar demand among reserve managers marks a break, at least in the short term, from a gradual decline in allocation to the greenback among central banks as the role of the US in global trade has waned.

The freezing of more than $300bn worth of Russian central bank assets in 2022 also sparked fresh calls among some of the world’s largest emerging economies to shift away from the dollar. 

“The fact the dollar is the most in-demand currency in the near term, whereas demand for the renminbi has flatlined, suggests that this broad narrative of de-dollarisation has at the very least stalled,” said Nikhil Sanghani, managing director at OMFIF.

Sanghani added that the strongest demand for dollars on a one- to two-year horizon was among central banks in Asia, while reserve managers in Asia and Latin America were most likely to plan reductions to their renminbi allocations.

At a summit of the so-called Brics group of countries last year — which led to Egypt, Ethiopia, Iran and the United Arab Emirates joining the emerging markets bloc of Brazil, Russia, India, China and South Africa in January — leaders charged their finance ministers and central bank governors with developing measures to reduce reliance on the dollar in trade among their economies. 

“There is a global momentum for the use of local currencies, alternative financial arrangements and alternative payments systems,” said South Africa’s President Cyril Ramaphosa, who hosted the summit, at the time.

But OMFIF’s report said short-term factors seemed to be driving the renewed demand for dollars among central banks, including expected higher returns from the US, where rates are forecast to remain higher than in China.

A number of central banks, including the European Central Bank, National Bank of Poland, the Reserve Bank of New Zealand and the South African Reserve Bank, have stated that delivering returns is part of their investment objective.

On a 10-year view, however, Sanghani said reserve managers still expected a “very gradual decline in the dollar’s share of global reserves” to an average allocation of 55 per cent dollar compared with 5.5 per cent for the renminbi, which was “broadly in line” with trends over the past decade.

The dollar currently accounts for about 58 per cent of global reserves, according to data from the IMF, down from 70 per cent at the turn of the century. The renminbi’s current share is 2.3 per cent. 

The average proportion of central banks’ reserves held in gold has risen from 9 per cent to 11 per cent over the past year, according to the OMFIF. A net 15 per cent are looking to increase their exposure over the next one to two years, even though gold is trading close to a record high. 

The report said that if this materialised again, as it did over the past year, central banks could buy an additional $600bn of the precious metal over the next one to two years.

https://www-ft-com.ezproxy.depaul.edu/content/1be234f2-c680-4ce9-beb7-d0d9a2793330