Dol­lar re­serve role se­cure but set to shrink: BIS

The Pak Banker - - FRONT PAGE -

The dol­lar's share of cen­tral bank re­serves may fall by as much as 10-15 per­cent­age points in com­ing years with­out threat­en­ing its role as the world's main re­serve cur­rency, a se­nior of­fi­cial from the Bank of In­ter­na­tional Set­tle­ments said to­day.

Peter Zoellner, head of the bank­ing depart­ment at the cen­tral banks' cen­tral bank, also told one of the year's big­gest gath­er­ings of for­eign ex­change deal­ers that the role of China's ren­minbi would con­tinue to grow.

He said there were signs that moves by Bei­jing to weaken the yuan and end a decade of con­stant ap­pre­ci­a­tion were push­ing some in­ter­ests to­wards its tightly con­trolled on­shore mar­ket and that this might de­velop fur­ther in com­ing months.

He ex­pected trad­ing and cen­tral bank re­serves held in the yuan to con­tinue to ex­pand "at a sus­tained pace" but saw no prospect that the Chi­nese cur­rency could re­place the dol­lar as the re­serve of choice over the next cou­ple of decades.

"It could hap­pen that the per­cent­age will go slightly down with the re­serve cur­rency from be­tween 65 and 70 maybe to be­tween 50 and 60 per­cent," he told the ACI Fi­nan­cial Mar­kets As­so­ci­a­tion congress in Berlin.

"But the rel­a­tive dom­i­nance of the United States dol­lar I do not be­lieve that this will change for the next 10, 20 years." Shifts in cur­rency al­lo­ca­tions by cen­tral banks, many of whom de­cline to pub­lish break­downs of how much they hold in re­serves in a par­tic­u­lar cur­rency, are close­ly­watched by for­eign ex­change mar­kets.

BIS is the big­gest repos­i­tory for data on vol­umes, move­ments and trade in cur­ren­cies world­wide. Its tri­en­nial sur­vey last year showed vol­umes of trad­ing had risen to an aver­age of $5.3 tril­lion a day.

Zoellner said the ex­pan­sion of yuan off­shore trad­ing was one fac­tor be­hind that rise and said he ex­pected China's re­cent moves to prompt fur­ther change in how its cur­rency regime, tightly con­trolled un­til now, op­er­ates.

"Most of the trans­ac­tions over the last few years have been done in the off­shore mar­kets... but there is more and more ac­tiv­ity in the do­mes­tic mar­ket in ren­minbi, quo­tas have been in­creased and so on," he said.

The moves by China, mainly car­ried out by shift­ing its on­shore ref­er­ence rate for the yuan against the dol­lar steadily weaker, has driven a surge in yuan trad­ing off­shore and an al­most 3 per­cent fall in the value of the yuan against the dol­lar, putting an end to one of the cur­rency world's few sure bets for steady ap­pre­ci­a­tion.

" The Chi­nese au­thor­i­ties are do­ing some­thing to break that ex­pec­ta­tion of low vo­latil­ity and one way di­rec­tion. This en­cour­aged some of the spec­u­la­tive (in­vestors) to do their short term trades in China," Zoellner said. "We will see how this works out, it has to be ob­served for the next cou­ple of months."

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