In my series related to inflation and reserve currencies, I was thinking about providing you with some updates, and “voilà”, it just so happens that the IMF just updated these weights over the weekend.
The criteria to determine such weights are very simple. The SDR composition should include currencies issued by members or monetary unions and these currencies should be underpinned by exports with the largest value over a five-year period. They also should be viewed by the IMF as being “freely usable”.
I am not going to dive deeper into the details of such a procedure here, but today’s update states that based on the value of exports in the world over the past 5 years, the RMB weight was raised to 12.28% from the 10.92% (+1.36) that was announced in 2016. The US$ is now at 43.38% from 41.73% (+1.65), and the Euro is lowered from 30.93% to 29.31% (-1.62). The same happened for the Japanese yen which fell to 7.59% from 8.33% (-0.74) while the British pound also declined to 7.44% from 8.09% (-0.65). This new basket will be renewed in 5 years.
This may sound very technical but let’s keep a bird’s eye view on what is going on here. You probably already heard about the loss of currency reserve status for the US$ while the RMB would take over as a leading reserve currency. That has been filling the news and analysis over the last few years. We have been highlighting that this is a trend to watch. Yet, as you can see, this is not likely to happen overnight if it does happen at all.
My personal view about this is the following. And it is grounded in three major trends to watch right now:
1) The fragmentation of the world and the deglobalization happening now
2) The new global value chains likely to emerge
3) The flow and direction of foreign direct investments
Given the interaction of these three core trends, it is very likely that the US$ will maintain its reserve status for a lot longer than anticipated. Global value chains are in the process of being reshaped as we speak but the largest markets with the strongest purchasing powers remain in North America and Europe. So expect the US$ and the Euro to maintain a strong role. As far as the flow and direction if foreign direct investment, we have to take a look at the structure of capital markets in the respective underlying countries they represent. The US capital will continue to play a dominant role for quite a while and that is not likely to stop overnight.
That’s what I wanted to share with you.
Let me know if you have questions and I look forward to hearing your thoughts. Feel free to comment.