When reserves are not reserves anymore.

When reserves are not reserves anymore.

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Governments and central banks maintain foreign reserves for monetary emergencies, such as a sudden and disastrous collapse of their domestic currencies.

As trusted and liquid assets, U.S. government bonds have long constituted the bulk of the world’s foreign reserves, hence the inherited name of “reserve currency”.

But matters are changing. US fiscal and current account deficit have lasted for too long in tandem. In this “twin deficit” setting, the US economy is continuously borrowing from foreigners to purchase foreign-made goods.

Standard economic theory predicts that twin deficits shall lead to the devaluation of the Dollar.  Worse yet, same theory – and past data – suggests that the devaluation may be sudden.

According to IMS estimates, a total of 149 countries have amassed Dollar-denominated assets worth $7 trillion, out of which China alone held $1.07 trillion. A putative 20% sudden devaluation would wipe out $1.4 trillion off the world’s Dollar-denominated reserves.

In the short run, such figures considerably decrease banks and investors’ appetite to store reserves in Dollars. Trump administration’s disastrous handling of COVID, combined with its unprecedented overall petulance did not resonate well either with the international community.

A sudden Dollar devaluation is not the only short run unpleasantness potentially on the horizon. Slow and continuous Dollar devaluation is also a danger on its own to export-reliant countries, whose re-valued currencies make their exports less affordable to their trading partners.

The long term does not look any better either for the Dollar. The post-WW2 monolithic Pax Americana is gradually transitioning into a multi-polar world, structured over regional influence mechanisms:

NAFTA in America, The Belt and Road Initiative in parts of Asia and the EU block in Europe, each willing to trade with each other but, at the same time holding separate economic interests, not anymore consistent with a single reserve currency.

Some telling data about reseve:

In 2002, Dollar assets accounted for 70% of global reserves. However, in 2020 for the first time since 1995 the share of U.S. Dollar-denominated assets in the world’s foreign reserves sank to 59%, as central banks and investors diversified holdings amid concerns over a sudden Dollar devaluation, and thus rebalanced towards alternative currencies as well as gold.

In 2020 China’s holdings of $1.07 trillion were 20% down from 2013. China has increased its purchases of Japanese yen-denominated bonds while Russia is moving towards gold and Yuan: last September its Russia foreign reserves (including gold) amounted to $578.7B.

Remarkably, the Dollar portfolio share was down to 20% of this figure, from 40% in 2017. Among others, Turkey, Brazil, and Hungary (a gold-reserves junkie) have discernibly been moving away from U.S. government bonds.

Virtually all non-Dollar assets are on the rise.  At the end of 2020 Euro – assets represented 21%  of the world’s reserves, Yen-assets had risen above 6% mark and the Yuan was scoring at 2%. In a 2020 IMF survey 26 unidentified central banks have confessed holding large gold reserves, amounting together to a significant $2.6 trillion.

Interestingly, the main quoted reason for hoarding gold was “international geopolitical challenges” Still, over the years the Dollar has been extraordinarily resilient.

Its often-trumpeted sudden demise has yet to materialize. Yales’ Stephen Roach, a former chairman of Morgan Stanley Asia was expecting a 35% sudden Dollar devaluation in 2020, primarily due to US decoupling of its trading partners.

But even he would reconsider his prediction today,  when US bod markets seem to have steadied up in response to the professionalism of the Biden administration.

Nevertheless, major Dollar-related concerns remain for the banker, the businessmen and the trader. Increased volatility in the composition of foreign reserves coupled with geopolitical risk mandate new and adequate financial instruments.

Impacts on global supply chain:

Hedging against Dollar devaluation, governments around the globe are starting to develop alternative reserve strategies. While some went with printed money or gold, some are considering digital currencies. As technology shifts our world to a cashless society, the introduction of e-renminbi and e-korona may only be a starting point of the digital currency journey.

An international trader might encounter trading instances potentially better serviced by non-Dollar means of payment. But the complexities of such trading can be bewildering. International payments, exchange rate shocks, taxation, as well as rapid changes in regional economies conspire to foment an untoward complexity.

As a result, to properly assess and mitigate the risk and uncertainty associated with these tempting but potentially dangerous non-Dollar commerce becomes the key to success.

As a fintech specialty lender with offices in Geneva and Shanghai, Cubri provides competent and professional advice on executing international trades and bank accounts in more than fifty local currencies to facilitate the trade finance activities of any potential clients in the multi-reserve-currencies new normal. Get in touch to find out more.


Carver, N., Pringle, R., & 2020, 1. (2020, November 23). Gold reserves in central banks – 2020 survey results. Retrieved May 10, 2021, from


Baker, S. (2021, January 11). U.S. Dollar is forecast to depreciate further in 2021. Pensions & Investments. https://www.pionline.com/special-report-outlook-2021/us-dollar-forecast-depreciate-further-2021.

Bluefinance. (2020, December 22). Dollar forecast: collapse in 2021? The analysis by a Yale economist. Finance Drops. https://www.financedrops.com/dollar-forecast-collapse-in-2021-the-analysis-by-a-yale-economi.

Roach, S. (2021, January 25). The Dollar’s Crash Is Only Just Beginning. Bloomberg.com. https://www.bloomberg.com/opinion/articles/2021-01-25/the-dollar-s-crash-is-only-just-beginning.