Are They Dropping Dollars for Euros as Reserves?

♠ Posted by Emmanuel in at 11/02/2009 04:23:00 PM
This is a wonky post that I believe needs to be made anyway. I have made it plenty clear that I am no fan of the dollar and that anyone dumb enough to hold it--including myself, of course--should not complain when the Fed decides to "create some inflation" as now-chairman Ben Bernanke (AKA B-B-B-Bennie of the Feds) puts it. Recently, I've come across articles that make noises to the effect that reserve holding countries are shifting in a significant way towards the euro. Let's start with Bloomberg:
While the dollar dropped in global currency reserves, holdings of euros rose to a record, the IMF report shows. The U.S. currency’s portion declined to 62.8 percent from 65 percent in the first quarter. The euro’s share rose to a record 27.5 percent from 25.9 percent while the pound and yen gained.
Martin Wolf also makes similar noises:
Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets – probably a generation away – the euro is the dollar’s only serious competitor. At present, 65 per cent of the world’s reserves are in dollars and 25 per cent in euros. Yes, there could be some shift.
You'd think I'd be overjoyed about this turn of events in which central bankers are fleeing Yanqui economolesters as fast as peaceniks from Dick Cheney, but no. These statements are most likely inaccurate unless these sources are privy to exclusive information the rest of us don't have. The main source for this data is the IMF Composition of Foreign Exchange Reserves or COFER. See here for the latest report. Actually, the Bloomberg report is accurate as of Q2 2009 if we consider only the reported holdings of countries that give the IMF the currency breakdown of their reserves. As you can see, however, only 62.8% of all reserves are denominated (I originally typed "demoninated"; it sound about right).

The biggie, China, holder of two trillion or so in reserves, does not report the composition of its reserve holdings. Nor do many Mideast countries that are also large reserve accumulators due to currently elevated oil prices. Hence, the best we can do is cite the abovementioned figures but say that they are only for reserves whose denomination is known--less than two-thirds of total global reserves. As for the overall move from dollars to euros, your guess is as good as mine as more than a third of the world's reserve holdings are of undetermined breakdown.

Unfortunately, the honest answer to this question is "I don't know" based on the available data.