Handbook of Exchange Rates

19.11 Diversification

Surprisingly, despite all the discussion and rhetoric, there is, in fact, little evidence of currency diversification since the start of the floating rate period almost 40 years ago. In 1973, at the beginning of the floating rate period, holdings of USDs represented 76% of total reserve holdings. Subsequently, USD holdings have ranged between a high of 80% in 1977 and a low of 51% in 1990 while averaging 65.4% over the period. In the past 15 years, the percentage of reserves held in dollars has been remarkably stable, fluctuating between 62% and 71% since 1995, with the high coming in late 2001, shortly following the record low of the EUR of about 0.82 cents. USD holdings have averaged 66% during the 15-year period. The Euro has gained marginally over the time period and now represents almost 30% of reserves with the remaining 10% in sterling, yen, Swiss francs, and “others” (Fig. 19.3). There are a number of reasons the dollar continues to hold its predominant place including its role as the global “cash” currency, the basis for exchange rate arrangements, invoicing foreign transactions, and so on. (For additional detail, see below.) From a larger perspective, the US and Euro area economies combined account for close to 50% of global GDP (Fig. 19.5). (Source: ADB, Jong-Wha Lee, p. 25).

Figure 19.3 Currency composition of official foreign exchange reserves ^*Countries with sizable reserves either joined (began reporting) the sample or left (stopped reporting) ...