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The U.S. dollar has been lagging its main rivals for 15 months, as worries over turmoil in Washington and the economy kept investors on their toes. Still, it’s unlikely that the buck will lose its position as the world’s favorite currency soon.
In the first quarter, the greenback DXY, -0.14% continued to weaken, as worries over trade wars, the stage of the U.S. economic cycle and the growing twin deficits—budget and trade—weighed on the currency.
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The dollar’s popularity among central banks did take a hit. Data from the International Monetary Fund showed that the U.S. currency’s share of global reserves dipped to a four-year low in the final quarter of 2017. The buck, however, remained firmly at the top of the table of global reserve currencies, holding a share of more than 60%.
Read: Global dollar reserves slip to 4-year low in 4th quarter of 2017, IMF data show
The reasons for the decline in reserve holdings are plenty, in part to do with exchange rate swings and changes in the price of U.S. dollar-denominated debt securities, which are a frequent target of reserve buyers. So the four-year low sounds much scarier than the reality underlying it, market participants said.
Meanwhile, the question of whether China’s yuan USDCNY, +0.2321% USDCNH, +0.4144% could one day challenge the greenback’s standing as the world’s reserve currency remains fodder for speculation, especially after China launched a yuan-denominated oil contract last week, and trade war threats between China and the U.S. could scare reserve buyers away from the buck. But the yuan still has numerous hurdles to overcome before it becomes a major reserve currency.
To begin with, the yuan is still effectively pegged to a basket of currencies and only trades in a narrow band around a range set by Chinese authorities. As a result, they yuan trades both “onshore” and, more freely, “offshore.” Further, Chinese assets, including its currency are subject to capital controls, which prevent money from leaving China too quickly if things go south.
On top of all that, one thing that has ensured the dollar’s continuous spot as the global currencies over decades and decades is that a lion’s share of global contracts are denominated in it, including, for example, commodities, the majority of which are denominated in dollars.
Read: Could China’s yuan replace the dollar as a reserve currency?
As the IMF data highlights, the share of the yuan is still rather low at just 1.2% of global reserves, or $123 billion compared with total reserve holdings of $11.425 trillion. The increase of more than $30 billion over the year leading up to 3Q17, can mostly be explained by the appreciation of the yuan versus the dollar last year, as reserve holdings are measure in the U.S. currency.
Analysts also warn of jumping to conclusions over the future dominant global currency because the reserve managers tend to change their buying patterns and allocation at “glacial speed”.
The euro EURUSD, +0.2363% , the world’s second largest reserve currency, is also lagging behind with just above 20% of the global share, nowhere near a percentage that could endanger the greenback’s position in the near-term. However, market participants expect central banks to pivot more into the direction of the euro in 2018, after the shared currency gained an impressive 14.1% versus the buck last year.
Trailing the eurozone currency is the Japanese yen USDJPY, -0.04% , with 4.9% of the global allocation. For now, the evidence seems unequivocally clear — there’s no replacing the buck.