Currency Movements Drive Reserve Composition

14 Pages Posted: 11 Dec 2014

See all articles by Robert N. McCauley

Robert N. McCauley

Bank for International Settlements (BIS)

Tracy Chan

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: December 2014

Abstract

A long-standing puzzle in international finance is the durability of the dollar's share of foreign exchange reserves - which remains above 60%, while the weight of the US economy in global output has fallen to less than a quarter. We argue that the dollar's role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates - the "dollar zone". If a currency varies less against the dollar than against other major currencies, then a reserve portfolio with a substantial dollar share poses less risk when returns are measured in domestic currency. Time series and cross-sectional evidence supports the link between currency movements and the currency composition of reserves.

JEL Classification: E58, F31, F33

Suggested Citation

McCauley, Robert N. and Chan, Tracy, Currency Movements Drive Reserve Composition (December 2014). BIS Quarterly Review December 2014. Available at SSRN: https://ssrn.com/abstract=2535946

Robert N. McCauley (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Tracy Chan

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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