© Reuters. FILE PHOTO: An illustration showing a US $100 banknote is taken in Tokyo on August 2, 2011. REUTERS/Yuriko Nakao/File Photo
By Gertrude Chavez-Dreyfus
NEW YORK (Reuters) – The U.S. dollar’s share of currency reserves reported by the International Monetary Fund rose in the first quarter of the year, in the midst of a still-strong cycle of interest rate hikes from the Federal Reserve aimed at curbing uncomfortably high inflation.
The dollar’s share of reserves rose to 59% in the first quarter of the year, from 58.6% in the last three months of 2022.
However, the share of the euro fell to 19.8% in the first quarter from 20.4% in the previous three months.
Global reserves, which are reported in US dollars, are central bank assets held in various currencies that are used in part to back up their liabilities. Central banks sometimes use reserves to help support their currencies.
“The dollar remains an attractive destination for those seeking returns or a safe place to hide given the uncertain outlook for global growth,” said Joe Manimbo, senior market analyst at Convera, Washington.
It was down about 0.9% in the first quarter after falling as much as 7.7% in the last three months of last year. In the second quarter, however, the dollar index recovered slightly, rising 0.4%.
On the other hand, the euro rose by about 1.2% in the first quarter, after rising 9.3% in the fourth quarter of 2022.
The Fed, which raised US borrowing costs last year and in 2023 more than at any time since the 1980s, raised interest rates to a range of 5.0%-5.25%, from 0% in March of 2022. On Friday, there is an opportunity by 84% for a 25 basis point interest rate increase at the July meeting.
Although the US central bank is nearing the end of the tightening cycle.
However, market participants believe that while the dollar will remain the dominant currency, its influence will eventually fade.
A survey by the Official Monetary and Financial Institutions Forum (OMFIF), a think tank, showed that 75 percent of central bank reserve managers surveyed expect only a slight decline in the dollar’s share of total reserves to 53% in the next decade, from just under 60. % now.
OMFIF said the shift would be in line with the slow, decades-old trend of de-dollarization.