de-dollar is not an individual task, it is trend. eurodollar have been circulating for decades, someone must use it regardless. but getting out of westerern banks is not unsurprising, some family offices went to singapore, middle east oil money went to hong kong to hedge the bets.
The Fed just out today. Dispute it if you want. I don't "fight The Fed":- https://libertystreeteconomics.newy...-gold-and-official-foreign-exchange-reserves/ Liberty Street Economics « Do Exchange‑Traded Products Improve Bitcoin Trading? | Main MAY 29, 2024 Taking Stock: Dollar Assets, Gold, and Official Foreign Exchange Reserves Patrick Douglass, Linda S. Goldberg, and Oliver Z. Hannaoui Global central banks and finance ministries held nearly $12 trillion of foreign exchange reserves as of the end of 2023, with nearly $7 trillion composed of U.S. dollar assets. Nevertheless, a narrative has emerged that an observed decline in the share of dollar assets in official reserve portfolios represents the leading edge of the dollar’s loss of status in the international monetary system. Some market participants have similarly linked the apparent increase in official demand for gold in recent years to a desire to diversify away from the U.S. dollar. Drawing on recent research and analytics, this post questions these narratives, arguing that these observed aggregate trends largely reflect the behavior of a small number of countries and do not represent a widespread effort by central banks to diversify away from dollars. Central Bank Reserves Foreign exchange reserves are assets held by a central bank in foreign currency. They often consist of bonds, deposits, banknotes, and government securities, but can also include commodities like gold and silver. Many global central banks choose to hold reserves in foreign exchange to support confidence in their monetary and exchange rate policies, including the capacity to intervene in support of the local currency. As the International Monetary Fund (IMF) discusses, foreign exchange reserves can also absorb pressure on currencies during times of crisis or when access to international borrowing is curtailed, giving markets greater confidence that a country can meet its external obligations. The IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data reports aggregates of the currency composition of foreign exchange reserves held by central banks. The chart below presents the dollar share and the share of the “Big 4” currencies (dollar, euro, yen, and pound), showing that both peaked in 2001. Following the global financial crisis, the U.S. dollar share recovered to 65 percent in 2015, but then saw a 7 percentage point decline from 2015 to 2021. Dollar Share of Foreign Exchange Reserves Has Declined over Recent Decades Sources: International Monetary Fund, Currency Composition of Official Foreign Exchange Reserves (COFER); authors’ calculations. Notes: The chart shows global trends in central bank foreign currency allocations. “Big 4” refers to the U.S. dollar, Japanese yen, euro, and British pound. A New (Simple) Decomposition Provides Perspective on Reserve Portfolio Changes New research by Goldberg and Hannaoui (2024) shows that, conceptually, the changes in the dollar share of aggregate reserves are driven by two very different forces. First, the change in preferences for holding dollar assets can evolve at the country level and interact with the initial reserve balance of a country. Second, global aggregates can evolve across periods due to changes in the quantities of reserves held in the portfolios of countries, interacted with their initial dollar portfolio allocation. Thus, countries that see large changes in the size of their reserves and with an initial dollar weight significantly different from the average can contribute substantially to global aggregates of foreign exchange currency shares for reasons unrelated to changes in preferences for holding dollar assets. Two types of country-level data are used to provide insights that further unpack the importance of these factors: country foreign exchange reserves data (IMF International Financial Statistics) and data on the country-level composition of reserves drawn from researcher estimates (Ito and McCauley 2020). Using the latter, one can estimate the components of the 7 percentage point decline in the U.S. dollar global reserve share observed between 2015 and 2021. The decline is defined by three parts. First, the weighted sum of the preferences for dollar assets across countries for which there are estimates for both 2015 and 2021 accounts for 0.3 percentage points. In aggregate, this summation explains almost none of the total change in the COFER dollar share. Second, the pattern of accumulation and declines in reserve portfolios explains 3.8 percentage points of the aggregate U.S. dollar share decline. The implication of this analysis is that half of the overall dollar share decline is not attributable to changes in dollar preferences. The decomposition allows us to estimate the third part—the portion of the aggregate U.S. dollar share decline in total foreign exchange reserves attributed to changing preferences for dollar assets by countries for which estimated portfolio allocations are unavailable. This total component, dominated by the larger reserves of China and India, accounts for approximately 2.9 percentage points of the 7 percentage point decline in the U.S. dollar share of the total. While these specific estimates could change by including other countries that are missing from our analytics but included within the broader COFER construction, the overall patterns will be robust. Looking more closely across country-level data, a small set of countries played a large role in the aggregate statistics. Switzerland—having raised total reserves by almost half a trillion dollars during this period—contributed nearly 1.8 percentage points to the global allocated U.S. dollar share decline. The observed effect contributed by Switzerland is due to its accumulation of euros, largely as a result of a monetary policy framework that at times limits movements in the euro–Swiss franc pair. This contribution is, then, a story of Swiss monetary policy, and not one of a declining preference for dollar assets. Russia also saw significant foreign exchange reserve growth from 2015 to 2021, increasing its reserve balance by over $150 billion while simultaneously lowering its share of dollar assets by 29 percentage points. This led to a contribution of 1.8 percentage points to the 7 percentage point decline in the aggregate dollar share. The data on estimated portfolio shares show a mix of both positive and negative changes in U.S. dollar asset portfolio shares across countries. It is therefore not the case that countries are moving away from dollars en masse. Indeed, increasing U.S. dollar shares from 2015 to 2021 were a feature of thirty-one of the fifty-five countries for which there are estimates. The decline in the dollar preferences of a small group of countries (notably China, India, Russia, and Turkey) and the large increase in the quantity of reserves held by Switzerland explain most of the decline in the aggregate dollar share of reserves. Do Relative Returns on Assets and Geopolitical Considerations Drive Portfolio Shifts? We use regression analytics to explore the contributions of standard determinants of the U.S. dollar share of country reserves. The standard determinants include the use of currency pegs; country bilateral trade shares with the U.S., euro area, and Japan; and the currency denomination and level of external debt. Our research finds that the main drivers of portfolio allocations continue to be the traditional ones that stress currency pegs, proximity to the euro area in trade, and debt exposures. The first new conjecture tested is whether the dollar share will be lower when other reserve currencies have higher returns. To get at the idea that parts of the portfolio might be managed with different strategies, official reserve portfolios are interpreted as composed of a liquidity tranche—needed to meet some short-term objectives in the event of a funding market disruption—and an investment tranche. Liquidity tranche proxies are alternatively defined as three months of country goods and services imports or a country’s short-term liabilities, both of which are approaches to defining minimal reserve balances as provided in guidance from the IMF. The investment tranche is defined as the excess of total official reserves relative to liquidity needs. Accordingly, we also test whether this portfolio tilt from currency returns can be magnified in a low U.S. interest rate environment, and when central banks have a larger investment tranche. Our research suggests that relative returns on sovereign assets—for traditional and nontraditional reserve currencies—have not played a large role in the dollar share of official reserves. Low interest rate and zero lower bound periods did not significantly magnify or tilt the effects of relative returns on sovereign assets. In addition, relative to past analysis, we find a stronger effect of proximity to the euro area on tilting some portfolios away from dollars. The second conjecture is that the dollar share can be lower for countries that are geopolitically less aligned with the U.S., at least compared to dollar shares that would otherwise be suggested by their patterns of trade, debt finance, and currency regimes. One part of the explanation might be that these forces are stronger when central bank reserves are larger than their liquidity needs—allowing reserve managers to chase yields. Tests of this conjecture use country voting agreement with the U.S. at the United Nations General Assembly, introduced in continuous form or in discrete categories of agreement (low, medium, or high). Our research finds that geopolitical considerations do play a role in dollar shares, though, surprisingly, they reduce the dollar share mainly when country reserve portfolios are already large enough to meet their potential foreign currency liquidity needs. How to Interpret the Sharp Rise in Central Bank Holdings of Gold Central banks have increased their gold purchases notably since the global financial crisis, and this trend appears to have accelerated recently. According to World Gold Council data, global central banks purchased over 1,100 tons of gold in 2022—more than double the purchase amounts of the previous year—and maintained a similar purchase level in 2023, as shown in the chart below. Increases in Global Central Bank Gold Holdings Source: World Gold Council. Market participants have attributed this increased demand to three factors: (1) gold’s perceived value as an inflation hedge amid growing concerns around central bank credibility and independence, (2) gold’s use as a risk hedge, given elevated economic and financial uncertainty, and (3) gold’s use as a sanctions hedge as it has no issuing government. Gold’s seeming safety from sanctions has been widely viewed as a particularly salient factor behind official gold purchases since Russia’s invasion of Ukraine in 2022 and the G7 countries’ subsequent decision to freeze the foreign exchange reserves of Russia’s central bank and forbid their banks from doing most business with Russian counterparts. Arslanalp, Eichengreen, and Simpson-Bell (2023) provide evidence of the application of multilateral sanctions as a driver for emerging market and developing countries. Central banks themselves have noted sanctions concerns as a driver of gold purchases and of increased vaulting of gold domestically in recent reserve manager surveys. Moreover, we find that countries that are geopolitically less aligned with the U.S.—as proxied with their voting agreement with the U.S. in the United Nations—have tended to be the largest gold purchasers in recent years (though low voting alignment with the U.S. is not a strong predictor of gold accumulation overall). While these gold purchases are certainly notable, the broader implications for central banks are limited. First, gold’s share of aggregate reserves remains modest at about 10 percent, roughly its level in the early 2000s, as shown in the chart below. Second, IMF country-level data suggest that most of the increase in official gold holdings has come from just a few central banks. More than half of reported gold accumulation since 2009 was from China and Russia, with another quarter coming from a handful of emerging market central banks (Turkey, India, Kazakhstan, Uzbekistan, and Thailand). Lastly, gold retains important shortcomings as an alternative to fiat currencies. It bears no interest and, as a physical asset, is difficult to use in transactions, to say nothing of its high transportation, warehousing, and security costs. Ratio of Gold to Official Foreign Exchange Reserves Remains Low Source: IMF International Financial Statistics. Note: Gold shares are calculated based on market valuation of gold. Conclusion Overall, our research suggests that the narratives about declining dollar shares in official reserves, and increasing roles for gold holdings by central banks, inappropriately generalize the actions of a small group of countries. The decline in the dollar share of reserves is not even always about dollar preferences. Our findings add insights to the messages of the ECB’s 2023 report on the International Role of the Euro, wherein a careful survey of key announcements of country intent to shift the currency composition of their reserves was not accompanied by material changes in key indicators of international roles of the dollar.
putin can’t use dollar not euro at the moment, the trade is via off-setting central bank ledger. the oil trade, even with the indians, is settled in rmb.
China could pay in dollars as they have large dollar reserves, and Putin would definitely prefer that. China, of course , prefers to pay in Renminbi, and they are in a position to dictate terms to Russia.
China has its own international payment system like we do in the West via SWIFT called CIPS (Cross-border Interbank Payment System): https://en.wikipedia.org/wiki/Cross-Border_Interbank_Payment_System This is a direct result of the funny FATCA regulations that the US has imposed on the global banking system - forcing any bank handling US Dollar transactions to report to the fine tax and government institutions of the USA. CIPS has been basically introduced to show the US the middle finger (punch intended).
https://www.tipranks.com/news/u-s-saudi-petrodollar-pact-ends-after-50-years U.S.-Saudi Petrodollar Pact Ends after 50 Years With the expiration of a 50-year-old pact with Saudi Arabia, the U.S. dollar’s strength may have lost one of its most powerful tailwinds. The 50-year-old petrodollar agreement between the U.S. and Saudi Arabia was just allowed to expire. The term “petrodollar” refers to the U.S. dollar’s role as the currency used for crude oil transactions on the world market. This arrangement has its roots in the 1970s when the United States and Saudi Arabia struck a deal shortly after the U.S. went off the gold standard that would go on to have far-reaching consequences for the global economy. In the history of global finance, few agreements have wielded as many benefits as the petrodollar pact did for the U.S. economy. The petrodollar agreement, formalized after the 1973 oil crisis, stipulated that Saudi Arabia would price its oil exports exclusively in U.S. dollars and invest its surplus oil revenues in U.S. Treasury bonds. In return, the U.S. provided military support and protection to the kingdom. This arrangement was a win-win situation for both; the U.S. gained a stable source of oil and a , while Saudi Arabia secured its economic and overall security. Status as the Reserve Currency Oil being denominated in U.S. dollars alone has significance beyond the categories of oil and finance. By mandating that oil be sold in , the agreement elevated the dollar’s status as the world’s reserve currency. This, in turn, has profoundly impacted the U.S. economy. The global demand for dollars to purchase oil has helped to keep the currency strong, making imports relatively cheap for American consumers. Additionally, the influx of foreign capital into U.S. Treasury bonds has supported low interest rates and a robust bond market. In his recent book, Bonfire of the Sanities (December 2023), bestselling author and investment manager David Wright argues the strength of the dollar is a key factor behind America’s high standard of living. Wright declares that the reason why people in the U.S. enjoy “as high of a standard of living as we do is because the dollar is strong.” Wright then explains this strength is partly because of faith in our economy “and because energy can’t be bought without U.S. dollars.” Potential to Disrupt the Global Financial Order However, the petrodollar’s dominance may be facing its most significant challenge yet. The agreement between the U.S. and Saudi Arabia expired on June 9, 2024. This expiration has far-reaching implications, as it has the potential to disrupt the global financial order. The shifting power dynamics in the oil market are a critical factor in this development. The rise of alternative energy sources, such as renewables and natural gas, has reduced the world’s reliance on oil. Furthermore, the emergence of new oil-producing nations, such as Brazil and Canada, has challenged the traditional dominance of the Middle East. U.S. Dollar’s Future The petrodollar’s expiration could and, by extension, the U.S. financial markets. If oil were to be priced in a currency other than the dollar, it could lead to a decline in global demand for the greenback. This, in turn, could result in higher inflation, higher interest rates, and a weaker bond market in the United States. Key Takeaway – A Significant Shift in Global Power Dynamics The expiration of the petrodollar agreement represents a significant shift in global power dynamics. It highlights the growing influence of emerging economies and the changing energy landscape. While the full implications of this shift remain to be seen, investors should at least be aware that on a macro level, the global financial order is entering a new era. The U.S. dollar’s dominance is no longer guaranteed.
%% And I assume China border battles with India will not result in war, but just a guess. Wonder why N Korea was not included in BRICS; MSFT exec , concerning cybersecurity, included N Korea in with russsia + china= ''bad actors'' JUNE 13 post market post.