By Babajide Komolafe
CENTRAL Banks ofemerging market countries have cut down their dollar reserve for the second consecutive quarter, says Goldman Sachs Group Inc.
The dollarâ€™s share stayed below 60 per cent in the three- month period ended September 30, a level that had not been broken for five years until the second quarter, according to Goldman Sachsâ€™s analysis of an International Monetary Fund report released Saturday.
â€œIt is getting more and more difficult to dismiss the ongoing decline in the share of dollar reserves as temporary noise,â€ the London-based Goldman Sachs economist Thomas Stolper wrote in a research note to clients.
â€œIt is now increasingly likely that emerging-market central banks have indeed decided to reduce the share of dollar reserves.â€
The greenbackâ€™s share represented 57.5 per cent of the reserves of developing countries in the third quarter, according to Goldman Sachs. The dollarâ€™s share of global foreign reserves decreased to a decade low of 61.6 per cent, from 62.8 per cent in the previous quarter and 64.5 per cent a year earlier, the Washington-based IMF reported.
Developing countries including China and Russia questioned the dollarâ€™s status as the worldâ€™s dominant reserve currency this year after the U.S. Treasury sold a record amount of debt to help the nation recover from the worst economic slump since the Great Depression.
World Bank President Robert Zoellick said in September that the dollarâ€™s status will be challenged and shouldnâ€™t be taken for granted.
â€œThere is no evidence of actual selling of dollar reserves,â€ Stolper wrote. â€œHowever, during a quarter where the dollar declined by about 3 per cent on a broad basis, emerging- market central banks failed to offset the valuation loss as they have always done in the last five years. Instead, they only kept a relatively small part of incoming reserves in the dollar.â€
The Federal Reserveâ€™s Dollar Index, a gauge of the greenback against the most-traded currencies, lost 3.1 per cent to 74.63 during the third quarter. The gauge of the dollar has decreased 22 per cent since the end of 1999.
Global central banks increased their total foreign reserves by 4.7 per cent to $7.5 trillion as of September 30, the IMF reported. Developing countries held $4.8 trillion, or two- thirds of the total.
Currencies including the Australian and Canadian dollars benefited from the move of central banks away from the greenback, according to Goldman Sachs. The category of â€œother currenciesâ€ increased to 3.2 per cent, from 2.2 per cent, the New York-based bank reported, working with IMF data.
â€œWhile it is clear that the changing accumulation trends do not imply outright dollar selling, as long as overall reserves continue to grow, it is also clear that the implicit support for the dollar is becoming weaker than it would have been when dollar shares were being kept stable,â€ Stolper wrote.
The IMF calculated the dollarâ€™s share of reserves based on data from central banks that report their currency allocations, which account for 59 per cent of total global reserves. Some countries, including China, the worldâ€™s largest reserve holder, donâ€™t give currency breakdowns.