Christopher Swann

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Empty talk of dollar diversification

By Christopher Swann
June 10, 2009

Rhetorical attacks on the dollar’s supremacy occur with monotonous regularity. They usually come from nations with strained political relations with the U.S. who resent the dominance of the greenback. Iran, Venezuela and Iraq (under Saddam Hussein) all took shots against the dollar.

The announcement by the Russian  central bank is part of this tradition, even though it was more diplomatically worded. 

The notion that the IMF bonds could ever serve as an alternative to dollar reserves is especially comical. It is not quite clear yet what form the IMF bonds will take. But they may well be highly illiquid. The IMF toyed with the idea of issuing bonds to the market as the World Bank does. It rejected the notion with little debate. After more than 60 years of dealing directly with governments, the IMF seems to prefer it that way.

It is also worth noting that if Russia does diversify into SDRs – the IMF’s currency basket – it will end up holding a large chunk of dollars anyway. As of 2006 the SDR is 44 percent composed of dollars. According to some sources the Russian central bank only holds about 41.5 percent of its reserves in the US currency at present.

So far, evidence of diversification of reserves away from the dollar is remarkably slender. IMF data generates far too much attention when it shows the dollar’s share of foreign exchange reserves falling. This is often because the value of the dollar is falling. Unless this data is adjusted for currency valuations, something the IMF should consider doing directly, it doesn’t offer much insight.

Marc Chandler at Brown Brothers has pointed out that Treasury data indicates that Russia has carried on buying US government bonds at a fairly brisk pace. Since June 2008 Russia has added around $43 billion to its Treasury holdings. Brown Brothers believes the latest announcement is posturing.

But as we have written before, Russia (and also China) are using the current environment to try and reduce US hegemony in the global financial markets.  Attempts to lessen the dollar’s preeminence is a calculated move on the part of Russia and China, in our view.  Russia comments also come ahead of President Obama’s visit to Russia next month, and such noise typically picks up ahead of time as Russia tries to set the table for discussions.


Central banks generally like to keep the precise composition of their holdings secret. Instead of public posturing, perhaps they could just make their reserves public. That way we would be spared their all too frequent comments on the dollar.

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