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Quick non-technical chart thread on FX reserves - with the caveat that these draw on the IMF's COFER data, which is excellent, but not perfect. Countries can and do hide their activities, and these numbers don't capture many nuances (see Eichengreen, McCauley, etc for more) (1/7)
Broadly speaking, FX reserves are used to manipulate your currency higher (by buying) your domestic currency when it comes under severe selling pressure - or, during the accumulation phase, to achieve neomercantilist objectives by manipulating your currency lower (2/7)
To achieve this, the weighting of currencies needs to broadly correspond with the weighting of trade transactions. You can hodl a whole bunch of bitcoin, but it won’t help offset selling pressure during a crisis - or lower your exchange rate during the accumulation phase. (3/7)
Also, although yield is nice, reserves are not there to act as investment vehicles (that’s what SWFs do), and managers often accept negative real yields in return for safety and liquidity. This reality is often missed in recurrent media reports about the dollar's demise (4/7)
Here’s the distribution of allocated reserves across major currencies - as you can see, the dollar is roughly as dominant as it was in 1980 - and the renminbi looks like a rounding error: (5/7)
FX reserve (allocated and unallocated) accumulation slowed, and went into reverse in 2013 when the taper tantrum pressured emerging markets, oil prices fell (crushing petrodollar recycling), and China allowed the renminbi to rise: (6/7)
FX reserves hit 16% of global GDP in 2013-14. There are good reasons to suspect this stock will fall and become more diversified in the years ahead, but changes in policy and trade relationships will drive that - not perceptions of the dollar’s value. (7/7)
