Central banks have resumed their diversification away from the U.S. dollar, cutting the percentage of reserve assets held in dollars, as shown by the dark blue line in the chart below. Thing is, when this happened previously, the euro served as the dollar’s replacement.
It’s not so this time, as shown by the declining light blue ‘EUR’ line below.
So where are reserve assets being parked, if not in the USD or EUR? In ‘other currencies’:
Morgan Stanley’s Emma Lawson:
The allocation to USDs dropped to 57.3% from 58.1%, which was unexpected given the global environment. USDs remain the greatest weight in reserves, but over time we anticipate that reserve managers may reduce their holdings further. However, as we discuss later, there is a limit to how low this allocation can go, due to a dearth of liquid alternatives. The allocations to GBP and JPY were relatively stable at low levels, while the big surprise was the rise in “other” currencies.
The “other” category likely includes smaller, less liquid G10 currencies and perhaps larger, freely traded and more liquid EM currencies. This allocation rose to 8.5% from 7.5% – its long-term average. Anecdotally, we estimate that this category includes currencies such as the Australian and Canadian dollars.
This shift is shown by the rising orange line in the chart. Witness the rising status of developed economies outside of the U.S., Eurozone, UK, and Japan.
(Via Morgan Stanley, A Serving of Reserving, Emma Lawson, 8 July 2010)