Are the days of dollar love ending? – Opinion News
The Russian invasion of Ukraine (February 2022) was/is terrible in terms of the human suffering it has caused. A more mundane impact is that it has also created a wave of fundamental change in financial markets, as a result of US sanctions blocking Russia’s access to SWIFT — by far the most widely used international clearing and settlement system.
Because of this, most global central banks, wanting to hedge against any possibility of falling afoul of the US, have been reducing their dependence on US dollars for their reserves. One of the most popular routes has been to buy gold, which has risen by more than 40% since October 2022 to touch and threaten almost daily the all-time high of USD 2,390 per ounce.
The Reserve Bank of India (RBI) has been no slouch in this area, and has been buying gold steadily since April 2022. Its gold holdings have risen from 680 tonnes to 740 tonnes in March 2024, rising every month in the past two years, except for February, March, June, and October 2023. (The drops in February, March, and June were relatively modest and could be the result of data errors. However, the decline in October 2023, which was a huge 11.32 tonnes, is too large to ascribe to data errors, and it would appear that the RBI did, indeed, sell about 10 tonnes of gold, which has not been reported anywhere. We have drawn data from the RBI’s website and Bloomberg and have triple checked our calculations — we could, of course, still be wrong, but we thought it is an important enough issue to query.)
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Along with buying gold, central banks have also been diversifying their foreign currency holdings, reducing dollars in favour of other G-7 currencies, the Chinese yuan (which is now a hefty 12.28% of the Special Drawing Rights or SDR) and, perhaps, currencies of trade partners.
We have been analysing the break-up of the RBI’s reserve assets since 2008. A paper we prepared at that time ( FX reserves management: Is RBI marching to its own drum?) indicated that just 50% of the RBI’s FX reserves were in USD, as compared to an average of 66% in developed countries); EUR made up a further 35% of the RBI’s reserves, taking the joint total close to the 90% that prevailed in most countries at the time. Since then, this total has doubtless fallen, partly with the 2016 introduction of Chinese yuan into the SDR and, of course, more recently, since 2022, when many countries were trying to reduce their dependence on the still-almighty dollar.
Our analysis began with logging the month-to-month change in reserves in USD terms (as reported by the RBI); from this, we (1) deducted USD paid/received to/by the RBI to buy/sell gold each month, the monthly current account deficit and actual outward foreign direct investment flows; and (2) added monthly remittances and portfolio inflows. This gave us what we call the “change in net reserves”, which includes the changes in valuation of reserves held in non-USD currencies due to changes in the value of the dollar.
Then we logged the month-to-month change in the dollar index (DXY) taking care to capture the DXY data on the same date as the reserves were released. (We have assumed that the composition of DXY and the break-up of the RBI’s non-USD reserves were identical. The dollar index comprises 57.6% EUR, 13.6% JPY, 11.9% GBP, 9.1% CAD, 4.2% SEK, and 3.6% CHF; this almost certainly does not correspond exactly to the RBI’s non-USD basket. This could throw the correlations off but not in a material way.)
The chart, which plots the percentage change in net reserves and the percentage change in DXY, shows a very strong negative correlation — i.e. when DXY rose, the value of net reserves fell (as a result of the reduction in USD value of the non-USD reserves) and vice versa. The correlation was a huge -81%. If the reserves were entirely in dollars, the correlation would be 1; if they were entirely in non-dollars (in the exact DXY ratio), the correlation would be -1.
The analysis indicates that the non-USD share in the RBI’s foreign currency assets today is 81%, which means that the USD share in the RBI’s reserves is down substantially (from 2008) to around 19%.
While the exact number may be somewhat different (in view of the assumptions mentioned earlier), we believe the direction — that the RBI is holding an even smaller percentage of USD than the 50% it held in 2008 — is correct, reflecting global circumstances where central banks all over the world are reducing their dependence on the dollar.
