A large new supply of fuel appears likely to support the US dollar’s attempted rally in the markets in the coming weeks, but the greenback continues to lose appeal among central banks.
These are intense days for the US dollar. Last Tuesday, on the eve of the FED’s decisions and after digesting the data on the labor market, the Bloomberg Dollar Spot Index had approached the highs of the year, recording a variation of 1.1% in four sessions. Inflation that is harder to beat and the prospect of higher rates for longer makes the US currency attractive to international investors. But there’s more. In fact, the positive moment of the US currency could be supported by the many uncertainties that are materializing in Europe in the aftermath of the European Parliament elections. According to many analysts, in fact, the turbulence that is affecting French debt (and marginally that of the other peripherals) could increase the risk aversion of international investors and divert them towards one of the few “safe haven assets” still present on the market: the dollar, precisely.
If what has been described is one of the potential short-term scenarios on the currency market, the situation changes if we change perspective and protagonists of the story. In fact, according to data collected by the International Monetary Fund, the dominance of the US dollar in the foreign currency reserves of central banks and governments, unchallenged for decades, is increasingly at risk. This highlights a sort of decoupling between market assessments and the choices of the monetary authorities. From 2010 to 2023 the value of the dollar Index (made 100 in 2006) went from around 80 points to almost 120. In the same period the percentage of monetary reserves in dollars fell from 62.18% to 58.41%; an even more marked decline if we consider the period 2016-2023, with the percentage going from 65.36% to 58.41%.
A trend which, however, has not benefited the other “big” global currencies (Euro, Yen and Pound). In fact, it was above all “non-traditional” currencies such as the Canadian and Australian dollar, the Chinese yuan, the currencies of South Korea and Singapore that benefited; those of Northern European countries.
The IMF explains this change in preferences with the desire on the part of institutional managers to increase diversification and benefit from good returns, favored in this by greater simplicity in transactions. However, the influence of the geopolitical situation on the choices of the central institutes appears to be little. In fact, if Russia is excluded from the Fund’s statistics (hit by international sanctions and with the greatest need to break away from the US dollar), the trend described above does not show any noteworthy changes.
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