Move over, Greenback! We might just have a couple of new kids in the currency reserves block! Early last week, the International Monetary Fund (IMF) announced its plans to add the Aussie and the Loonie to its official currency reserves list.
In its quarterly released Currency Composition of Official Foreign Exchange Reserves (COFER) data, the IMF shows which currencies major central banks all over the world are holding in their reserves. The latest release revealed that some central banks are starting to stock up on the Aussie and Loonie, on top of the usual set of reserve currencies, namely the U.S. dollar, euro, pound, yen, and franc.
In the past, both the Aussie and the Loonie were simply included under the “Other currencies” heading of the IMF. This time around, as banks and financial institutions are seeking other safe-haven alternatives, the IMF thinks that it’s time to list the Australian dollar and Canadian dollar separately as more central banks are showing interest in holding these currencies.
Of course, some analysts were quick to point out that this is merely a technicality and isn’t really a big deal. Take note, however, that the IMF hasn’t designated a new reserve currency since it introduced the euro back in 1999!
Many also believe that the impact of the IMF’s plans would be more visible on a long-term scale. For one thing, having the Aussie and the Loonie as currency reserves would boost their demand as more foreign central banks consider these comdolls as “safe bets.” In fact, the Loonie has already gone up by almost 2.9% so far this year, thanks in part to increased interest from Russia, Switzerland, and other Asian and Latin American central banks.
Having the Aussie and Loonie as reserve currencies would also mean that comdoll traders would have one more factor to consider before trading them. AUD and CAD currently trade on commodity price action, risk appetite, and news on China. If AUD and CAD become official currency reserves, traders will now have to consider central bank appetite for the comdolls.
Last but not the least, take note that more currency reserves basically mean that demand for other currencies is growing possibly at the same rate as the demand for the ultimate reserve currency, the Greenback, is diminishing.
Because the U.S. owns the Greenback, it’s currently enjoying lower rates on its loans. It can also print money at will without much thought to the consequences since central banks have to hold them anyway. But if the dollar is eventually replaced by other currencies as the reserve currency of the world, then it would have a significant impact on Uncle Sam’s ability to pay back its ridiculously huge debts.
Of course, replacing the dollar can’t be done in a year or two. Most likely, the process will take at least half a decade to play out if it were to happen. Also remember that the IMF’s report lags by a couple of months. The report that we saw is just a reflection of a trend that’s already under way and isn’t likely to significantly affect price action in the near future.
But at least for now we have an idea of our alternatives while we make sense of the direction of other major currencies amidst the Greek bailout issue, the U.S. fiscal cliff, and even a possible U.K. credit rating downgrade.