U.S. Dollar Will Continue to Weaken a Bit: UBS’s Simmons
The US dollar will remain the world’s leading reserve currency for the next 25 years, while the euro and yuan are expected to increase their share of the world’s foreign exchange reserves. This follows from data from the UBS study published on Wednesday..
Global reserves are assets of central banks that are held in different currencies and are used primarily to collateralize their liabilities. Central banks have always replenished and sold off international reserves to influence exchange rates.
Currently, the dollar occupies about 60-65% of the world’s foreign exchange reserves, it follows from the information of central banks, which they provide to the International Monetary Fund..
This share may decline slightly over the next two decades, only because central bank governors want to increase holdings of other reserve currencies such as the euro and the yuan. This opinion is shared by Massimiliano Castelli, head of strategy and advice for global sovereign markets, at UBS Asset Management – one of the authors of the report..
The share of the euro and the yuan in world reserves will increase, but gradually, according to UBS. According to the IMF, at the end of the second quarter, the share of the euro was about 20%, while the yuan was only about 2%..
«In the end, we think that in reality, in the next 25 years, as we move on, we will have a world in which there will be three major currencies: the dollar, euro and yuan.», – Castelli told Reuters on Tuesday.
«Over the past 25 years, the dollar’s share has fluctuated between 60% -65% of foreign exchange reserves. I see no reason why we cannot see that the dollar will make up 50% of world reserves, the euro – about 20-25%, and the yuan – 5-10% and will become the third reserve currency», – he added.
The UBS report notes that the dollar remains «the ultimate safe-haven currency», and during periods of intense global risk, investors flock to US Treasuries.
The Swiss bank also referred to the dollar’s role as a global anchor for prices and interest rates. This could force central banks to hold excess US dollar reserves to match the dollar’s significant impact on trade and borrowing in their respective countries..
In the case of the yuan, the trade conflict between the United States and China did not slow down the growing interest of central banks in savings in this currency. But the problem is likely to reduce the yuan’s growth rate in global reserves, given the uncertainty surrounding the Chinese economy, UBS said in a report..
When asked about long-term dedicated allocations for the Chinese currency, central bank managers’ responses averaged 4.2%.
UBS’s Castelli cited China’s opening up of its financial markets, especially for fixed income instruments, as well as attractive bond yields as the main reasons for China’s attractiveness..