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'King Dollar' Isn't Dead

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Wednesday, 01 April 2015 05:58 AM Current | Bio | Archive


Many investors were confused by the creation of China’s new Asian Infrastructure Investment Bank (AIIB) (intended as a multilateral development bank to finance  infrastructure projects in Asia) and what impact it could have on the dollar.

Some people already consider AIIB as a rival to the IMF, the World Bank and the Asian Development Bank (ADB), which are all unequivocally dominated by the U.S. Others have gone even further (in my opinion, way out of context!) by saying China’s AIIB signals the beginning of the end of “King Dollar.”

Of course, that’s not the first time we have heard that.

The AIIB counts 27 Asian regional members, and three non-regional members, which are the U.K., Switzerland and Luxembourg, and 21 applicant countries (such as Germany, Russia and Brazil).

The United States and Japan have both declared no intention to participate in the AIIB.

On China and the AIIB, Treasury Secretary Lew made some interesting remarks at the Asia Society Northern California, stating: “… If China wants the renminbi RMB (the yuan is the basic unit of the renminbi) to increasingly be an international currency, a natural next step in the liberalization and reform (in a thorough manner) of the Chinese economy, China will need to successfully complete difficult fundamental reforms, such as capital account liberalization, a more market-determined exchange rate, interest rate liberalization, as well as strengthening of financial regulation and supervision … China has expressed interest in having the RMB qualify for inclusion in the Special Drawing Rights (SDR) basket, the IMF’s international reserve asset currently composed of the dollar, euro, pound, and yen … we encourage the process of completing these necessary reforms …”

Maybe it could be helpful for all those who have doubts on the dollar to take a look at the updated IMF Currency Composition of Official Foreign Exchange Reserves (COFER) as of Q4 of 2014 that show share of the dollar was up to 62.9 percent (dollar highest level since 2009) of the $6.1 trillion of allocated reserves of the world’s central banks while the euro’s share was down to 22.2 percent, which is its lowest level since 2002. The Japanese yen ranked third at 4 percent and remains practically unchanged, the British pound fourth at 3.8 percent while “claims in other currencies” remained stable at 3.1 percent.

It's a fact these data give us a dependable insight, which is of course not complete, where central banks' sizable official reserves are allocated and how these allocations evolve.

Maybe long-term investors could do well not fighting current trends of the world’s central banks official reserve allocations.

The divergences between Fed monetary policy that is on its way to normalization (which implies rising Fed rates), and the ECB’s quantitative easing (QE) program (which implies negative rates at the ECB’s deposit facility and the opposite to the Fed's path) are at the root of the dollar’s rising share and the euro's declining share in the world’s central banks’ reserves.

Please also keep in mind central banks are not used to pay other central banks to keep their money.

The next IMF COFER data release for Q1 of 2015 is expected to show a further drop in euro-denominated debt, mainly as consequence after the Swiss National Bank “de-pegged” their currency from the euro and stopped buying sizable amounts of eurozone debt that were currency intervention operations and were not to be considered as permanent reserves.

Also interesting for investors, over the years we’ve seen IMF COFER currency allocations tend to track quite accurately, most of the time, currency movements versus the dollar.

The negative rate environment in the eurozone will continue to weaken the euro further and strengthen the dollar.

The era of “King Dollar” isn't over yet. No, not by a long shot — but that's my personal opinion.

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HansParisis
The negative rate environment in the eurozone will likely continue to weaken the euro further and strengthen the dollar in the foreseeable future.
dollar, currency, europe, investors
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2015-58-01
Wednesday, 01 April 2015 05:58 AM
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