Dollar Status Remains Solid

Dollar Status Remains Solid
Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound, and Chinese yuan banknotes are seen in this picture illustration on Jan. 21, 2016. (Jason Lee/Reuters)
Law Ka-chung

Currency status has been a hot topic for some time. When the euro emerged in 1999, many thought it would take over or at least split the share of U.S. dollar. It did not. From a longer historical time series showing official foreign exchange (FX) holdings (reserves) by currency compiled by the International Monetary Fund (IMF), the U.S. dollar remained at around 65 percent before (1998), and after (2003 to 2007) the emergence of the euro, it remained at a similar level even in up to a few years ago (2014 to 2016), right after the outburst of European sovereign debt crisis led by Greece.

While the above shows the currency status along with money’s function as a store of value, another equally important function is the medium of exchange. One commonly cited dataset is the currency share in the SWIFT payments system, but the history is short and cannot be traced before 2010. A more standard yardstick is the FX turnover survey by currency, as reported by the Bank for International Settlements (BIS). It documents how each currency is used not only in goods and services trade but also in finance. Yet the survey is done only triennially.

The latest survey was made in April this year and was formally released last month. The survey covers over 40 currencies, but here we chart only the first five. The record could go back to 1992, but here we start from 1998, the year just before the launch of the euro. Since two currencies are involved in each FX transaction, the total share adds up to 200 percent; but here, we divide everything by two so that all shares are normalized to the standard maximum of 100 percent. Compared to the previous survey in 2019, the total FX turnover surged by over 70 percent, which was a great leap.

Top 5 currencies' share in FX turnover. (Courtesy of Law Ka-chung)
Top 5 currencies' share in FX turnover. (Courtesy of Law Ka-chung)

From the accompanying chart, the status of the U.S. dollar showed little change over time by staying at 43 percent to 45 percent share of turnover. A quarter-century of history of the euro did not reinforce its share, but rather, its share declined from almost 20 percent to nearly 15 percent. The loss was occupied by other non-U.S. dollar currencies. This is related to the exchange rate but asymmetrically: When the euro went uphill before 2008 from 0.8 to 1.6, the share was flat; when it went downhill afterward from 1.6 to below par, a five percent share was lost. Many central banks cut losses from it.

On the surface, the Chinese yuan was the winner by gaining the most share three years ago. However, the SWIFT payments statistics show the yuan share did not advance by much but only from 1.9 percent to 2.1 percent between 2019 to now. Yet in the same period, the yuan share of FX holdings in the IMF’s record increased from 1.9 percent to 2.9 percent, a relatively obvious progress.

From this, one can see the yuan's role is more confined to the store of value in official reserves than a medium of transactions. The former role is highly dependent on currency value. As the yuan keeps depreciating under the worsening economy, can this be maintained for too long?

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Law Ka-chung is a commentator on global macroeconomics and markets. He has been writing numerous newspaper and magazine columns and talking about markets on various TV, radio, and online channels in Hong Kong since 2005. He covers all types of economics and finance topics in the United States, Europe, and Asia, ranging from macroeconomic theories to market outlook for equities, currencies, rates, yields, and commodities. He has been the chief economist and strategist at a Hong Kong branch of the fifth-largest Chinese bank for more than 12 years. He has a Ph.D. in Economics, MSc in Mathematics, and MSc in Astrophysics.
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