'Weakness is Undeniable': USD Reserves at Lowest Point in Five Years - Scholar

Sputnik discussed Russia's move to cut holdings of US sovereign debt with Dr. Binoy Kampmark, a global research journalist and senior lecturer from Melbourne's RMIT University.

Sputnik: How significant is this move for Russia and what does it mean for the US?

Binoy Kampmark: It is significant and may be seen as possible revenge for US sanctions (for instance, on aluminium-producer Rusal), but should not be taken in isolation. The trend had already started in 2018 with $85 billion shed of $150 billion holdings of US assets in the second quarter of 2018. The effect of this was to push increases in reserves in global central bank reserves in the euro, yen and yuan. Other countries have also bee shedding reserves. The broader question here is whether this will affect the US's ability to make borrowings of money. That is unlikely to be the case, given the influence of certain investors, including life insurers. Russia's move into increasing its gold reserves shows a move towards diversification, but does not necessarily end dollar dominance.

Sputnik: With the US' conflicts with Venezuela and Iran, there has been talk of another currency replacing the US dollar. How likely is this? What other currency can replace the dollar?

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Binoy Kampmark: There have been efforts to reconsider the dominance of the US dollar, but in the third quarter of 2018, it still made up 62 per cent of central bank foreign exchange reserves, which account for some 76 per cent of the world's GDP. Various economies have also pegged their currencies to the dollar. The euro tends to come in second, with 21 per cent, but the ascendancy of that currency is tied to Eurozone problems. The US dollar's fate is tied to that of the US economy — as long as it remains stable in some form, its currency will be hard to replace. That said, it is also clear that there is a move away from the dollar, a gradual one, but evident. The effects of this have been softened by Federal Reserve intervention via interest rate hikes.

Sputnik: Technically China could attempt to counter the influence of the US dollar, but from an economic point of view with Beijing holding most of US debt, would that be a beneficial move for China?

Binoy Kampmark: China comes in first with its ownership of US debt, followed by Japan and Brazil. The issue of a continuing damaging trade war, marked by occasional truces, means that Beijing will not be keen to push the issue. Skirmishes, not wars, are the order of the day in the economic context with the US. That said, decisions on shedding holdings can happen because of national considerations. In 2017, China reduced holdings to boost the yuan, something done by loosening its peg to the dollar. The influence of the US dollar, in other words, can be countered without being directly replaced. To that end, China has introduced yuan-denominated oil contracts.

Sputnik: How high are the chances of China following in Russia’s steps and dumping some of its US holdings?

Binoy Kampmark: China, as already mentioned, has already been dumping holdings in 2017. They did so in 2018 as well. They have been followed by Japan and also Russia. Saudi Arabia, by way of contrast, is a buyer. The point of this move is that USD reserves find themselves to its lowest in five years. But it remains dominant given the scale of the US economy and its performance. Weakness, however, is undeniable.

The three biggest holders of US sovereign debt are China, with $1.138 trillion, Japan, with $1.036 trillion, and Brazil, with $311 billion. The data also shows that China, as the largest holder of US debt, cut its holdings to $1.12 trillion, reaching the lowest level since November 2017.

The views and opinions expressed by the speaker in this article are his own and do not necessarily reflect those of Sputnik.