Ebbing dollar reserves only scratch on dominance :McGeever By Reuters

By Jamie McGeever

ORLANDO, Fla. (Reuters) -The U.S. dollar’s share of world currency reserves continues to ebb slowly – but reserve stashes are only one measure of its dominance of global finance, and there’s no realistic scenario where that gets derailed any time soon.

Central banks and private businesses need their rainy day funds to be in liquid assets that are easily accessible, in currencies that are widely accepted and in plentiful supply, and in jurisdictions with an internationally recognized rule of law.

The dollar meets all those criteria. No other currency comes close, even though the share of central bank reserves and global trade flows is increasingly being spread across a wider range of currencies.

The International Monetary Fund’s latest cut of central bank reserves shows that the dollar’s slice of the pie at the end of last year – before Russia’s invasion of Ukraine and freezing of Moscow’s FX reserves – was 58.8%.

That’s down from 59.2% the prior quarter and the lowest since comparable data were first tracked in 1999/2000. This is a long-term trend – the dollar’s share of known, or ‘allocated’ reserves was over 70% in 2002.

Bank for International Settlements data show that the dollar was bought or sold in roughly 88% of global foreign exchange transactions in 2019. That has remained pretty steady over the past 20 years.

A U.S. Federal Reserve paper in October showed that about 60% of international and foreign currency liabilities and assets – primarily claims and loans, respectively – are denominated in dollars. This share has remained pretty stable since 2000.

On trade, around 40% of global transactions in goods are invoiced in dollars. Global trade hit a record high of $28.5 trillion in 2021, according to the United Nations Conference on Trade and Development.

The 2000-2020 period was marked by China’s rise to global economic superpower, surging dollar reserves demand from Asia after the 1997 crisis, and an explosion in globalisation and cross-border capital and trade flows.

These forces will be nowhere near as strong in the next 20 years, so demand for dollars will ebb, even if only slowly and at the margins – but so too will demand for all other reserve currencies. And in the relative world of currencies, that doesn’t mean the greenback will lose out.

“You still need an alternative. Don’t forget, it took two World Wars and loss of Empire for sterling to lose its status as the world’s No. 1 reserve currency,” said Paul Donovan, chief economist at UBS Global Wealth Management.

“UNASSAILABLE”

Debate over the dollar’s future reserve status has intensified, with both sides broadly represented by two leading academics – University of California, Berkeley, professor Barry Eichengreen, and Columbia University professor Adam Tooze.

Eichengreen and his colleagues argue that the…