Central banks across the world confirmed the dominance of the US dollar as the world’s largest reserve currency in the third quarter, IMF data showed Friday, as they increased their share of US dollar denominated holdings while simultaneously lightening up on the crisis hit euro.
The fund’s quarterly Currency Composition of Official Foreign Exchange Reserves showed that total foreign exchange holdings rose to $10.17 trillion last quarter, up from $10.08 trillion at the end of the first half of 2011.
During the third quarter, the greenback comprised $3.36 trillion of allocated FX reserves, a nearly 2% increase from the prior quarter and 61.7% of total allocated reserves. Year-over-year, the dollar’s share of total reserves surged 7.5% from the comparable quarter in 2010.
A reduction in the size of euro-denominated holdings coincided with Europe’s debt crisis hitting a crescendo. The COFER data showed central banks trimming their euros to $1.4 trillion of allocated reserves in the third quarter, from $1.45 trillion in the prior quarter.
The IMF figures are divided into two portions: Reserves that are allocated are openly declared by member states. Unallocated reserves are assets held by countries that are either not members of the IMF, or opt not to open their holding to public scrutiny, such as China. During the third quarter, allocated reserves fell marginally, yet unallocated holdings rose by 2.5%
Despite continuing concerns about the U.S.’s massive fiscal imbalance that led to the world’s largest economy being stripped of its triple-A credit rating, the data underscored how the dollar remained the reserve currency of choice among global central banks, if for no other reason than a glaring lack of alternatives.
“The real point is despite all the talk, the dollar’s role as primary reserve asset remains unchallenged,” said Marc Chandler, global head of foreign exchange at Brown Brothers Harriman. Given the fact that a currency’s value can account for a substantial part of the quarterly fluctuation in the IMF’s data, “it wouldn’t surprise me if the dollar’s share grew even further in the fourth quarter,” he added.
The figures also illustrate how active foreign exchange markets were during the third quarter, as developments during that time frame largely benefited the greenback, which was already on the upswing due to safe-haven buying stemming from Europe’s debt crisis. During the third quarter, the Dollar Index rose by nearly 6%.
In August, Japan intervened to weaken its currency, while the Swiss National Bank surprised investors in early September by announcing a target exchange rate for the franc against the euro, which sent the franc plunging across the board.
Analysts say much of the common currency’s support has been derived from developing and oil-exporting countries, primarily in Asia and the Middle East, that hold vast amounts of dollars and need to find other currencies in which to park cash. The COFER data suggest this so-called reserve diversification effect waned during the third quarter.
Analysts at Scotia Capital pointed out in a research note that “faith in the euro [was] tested,” prompting reserve managers to cut their euro holdings to 25.7%, their lowest allocation in three years.