Global Reserves Crawl Towards Emerging Market Currencies

Since 2003, global reserves have more than doubled. There has been a gradual shift from U.S. dollars to euros over this time period; however, U.S. dollars still dominate in proportion at greater than 60% of total world reserves. In addition, emerging markets’ accumulation of reserves has outpaced advanced economies. Exports have contributed to emerging markets’ massive current account surpluses. In addition, capital inflows in emerging markets will magnify due to economic growth and interest rate differentials between Western and emerging market economies.

With massive amounts of reserves, currency diversification will be inevitable, but at a snail’s pace.

The good news is that during the global financial crisis, the magnitude of the devastation was partially mitigated by the growth of emerging market reserves playing a greater role in the world economy. Once recovery in the United States takes a stronger hold, the U.S. savings rate decline will continue that will restore the process of global imbalances. As long as the U.S. dollar remains the world’s reserve currency and continues wear the badge of being a safe-haven country, the United States will be able to finance large current account deficits.

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