Global stash of foreign currency holdings is dominated by Asia

CHINA dominates in holding far more foreign currency reserves than any other nation, with the Asian economic powerhouse in possession of around $3.1trn in reserves.

A ranking of the top 10 in the world for holding reserves of foreign currency is dominated by Asia – Japan, India, South Korea and Singapore all feature, according to research from the World Economic Forum (WEF).

So-called reserve currencies are held as savings by governments and central banks other than their own issuers, often because they are deemed stable assets and may be drawn on to world trade markets when domestic currencies are under pressure.

The US dollar has long been the world’s key reserve currency, and remains so, with the euro trailing in second place. Chinese aspirations to see its yuan emerge as a reserve currency, particularly in emerging markets, have so far failed to bear fruit – despite it now being a major supplier of goods to the global economy. Strikingly, the list of countries with the highest levels of foreign currency reserves doesn’t include major economies like the United States and Germany.

Both big economies – and others in the euro area including Ireland – are happy to hold reserves in their own currencies. Where foreign currencies are held, globally, the US dollar tops the list and accounts for 63.5pc of global savings, according to reports from central banks in the third quarter of 2017.

It is followed by the euro and Japanese yen. The yen, is in demand by countries in part because the export powerhouse sends $605bn of exports abroad every year, according to the WEF.

Several factors impact why a country holds foreign currency reserves, including to shore up its domestic currency by backing its stable assets. Similarly, a country with a floating exchange rate can buy up foreign currencies or financial instruments in order to reduce the strength of its domestic currency – something Switzerland has done – while foreign exchange reserves can also help a country maintain its liquidity during an economic crisis.

Knowing a government has reserves of foreign currencies can provide investors with increased confidence it can meet its external payment requirements. Reserves of foreign currencies may also be used to fund certain sectors of the economy, such as building infrastructure and ensuring access to internationally-traded commodities.

And, according to the WEF, when reserves of foreign currencies are plentiful, a country can even use them to influence international affairs.

This is particularly significant in the current climate, with the US and China threatening a global trade war at a time when China’s holding of dollarissued bonds makes it America’s most important creditor.

China’s stock of dollar reserves has been built up thanks to a$375bn goods-trade surplus with the US, however President

Donald Trump appears to be determined to impose protectionist policies, setting the world’s biggest economies on a collision course.

Last weekend he backed out of a joint communique agreed by G7 leaders in Canada that mentioned the need for “free, fair and mutually beneficial” trade and the importance of fighting protectionism, with his actions also putting strain on relations between the US and Europe.

(Additional reporting from Reuters)