The Increasing Role of Commodity Currencies as Forex Reserves

Here is more proof of the declining role of the US dollar as the de facto international currency reserve.

From BCA Research (bold emphasis mine)

In addition to the dollar, four currencies – the euro, British pound, Japanese yen and Swiss franc – have accounted for the vast majority of FX reserves. For most of the last decade, it was these currencies (especially the euro) that benefited from the dollar’s relative decline in global reserves. But there has been a new development to central banks’ diversification strategy; since early 2009, central banks have been looking to what the IMF simply classifies as “other currencies”. From 2% in early 2009, “other currencies” now account for almost 5% of total reserves; the holdings of these alternative currencies increased by $300 billion over a two year period. While the IMF does not provide any further information, we speculate that it largely consists of the commodity currencies: the CAD, AUD, NZD and perhaps the SEK and NOK. For these relatively small economies, $150 billion of annual capital inflows is an enormous amount to absorb. Bottom line: Central banks in emerging economies will continue to shift a portion of their new reserves into non-dollar currencies.

So diversification away from the US dollar continues to deepen.

But this time this has not been limited to currencies of other major economies, but more evidently to currencies which are backed by commodity production-exports.

With gold knocking at the recent highs and copper also within striking range to the recent highs (oil has been creeping higher while silver still consolidating after an explosive run), the likelihood is that given the persistent crisis in major economies, which are constantly being resolved by the printing press, we should see a more expansive role for commodity currencies as international foreign reserves.

The other way to view this is that the growing role of commodity currencies signifies a symptom known as “flight to real value” to a disease known as “inflationism”.