10 Takeaways From the IMF's COFER Report

By Mark McCormick

NEW YORK ( BBH FX Strategy) -- The International Monetary Fund recently released its report on the composition of official foreign exchange reserves (COFER). Here are 10 key takeaways from the report:

1. The pace of reserve accumulation increased in the fourth quarter, rising 0.3% to $10.196 trillion from $10.163 trillion in Q3. However, the pace of reserve accumulation declined from Q3, which increased 0.9%. From the end of 2010, total reserves increased nearly $500 billion.

2. Of the $10.196 trillion in reserves, the amount of allocated reserves increased by $51 billion. This contrasts with an $18 billion decline in the unallocated reserves, which include China and Taiwan.

3. The dollar holdings rose $49 billion among the total share of allocated reserves. This was a 1.4% rise from Q3 and a 7.6% rise throughout 2011. The dollar's share of the percentage of total allocated holdings also increased steadily through 2011. In Q4, the share of the U.S. allocated reserves increased to 62.1% from 61.8% in Q3.

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4. The euro's holding declined $21 billion among the total share of allocated reserves. However, on the year, the euro's total value was largely unchanged, with a 0.09% increase. Claims in sterling and yen also improved from Q3. Outside the rise in the dollar, total claims in "other" currencies rose $20 billion, marking a 15% increase throughout the year.

5. The euro's share of allocated reserves slipped again in Q4 to 25% from 25.7%. After a decline in Q3, sterling's share remains unchanged at 3.9%. The yen's share also remained unchanged at 3.7%.

6. The change in reserves can stem from a conscious decision to shift allocation decisions, through diversification or intervention. However, to determine the magnitude of the shift in reserves you must adjust the currencies for relative swings over the time period. Over the course of Q4, according to the exchange rates provided by the IMF, the dollar appreciated against all the major currencies (see chart).

7. In Q4, the dollar's biggest moves were against the European currencies. The dollar appreciated against both the euro and the Swiss franc over 4%. Sterling declined nearly 1% and the dollar advanced 1.4% against the yen.

8. After adjusting for valuation swings, the key takeaway is that the large share of the reserve accumulation in dollars reflects currency strength, rather than accumulation. In fact, emerging and developing countries reduced their holdings of USD -- though it is likely that EM reserve managers reduced their holdings in part to stabilize their own currencies through intervention.

The Bank of Japan's record currency intervention, at $118 billion, also boosted demand for the dollar. Given the rise in USD holdings were $49 billion, this indicates that outside the BOJ reserve managers diverted their share of holdings out of USD.

9. There is a clear difference of reserve preference between the advanced industrialized countries and EM countries. The former continues to hold a larger share of its accumulated reserves in dollars (66%) than the latter (57%). The absolute share is also higher. However, the recent pace of accumulation is also higher in the industrialized countries, when compared to the developing countries, due to the record BOJ intervention. This was partially offset by the roll-off of Swiss National Bank swaps used to inject liquidity. However the change in the industrialized countries claims in USD stems largely from the operations of the BOJ and SNB.

10. The claims in other currencies continue to increase. Indeed, both advanced and developing countries stepped up their purchases of other currencies. The pace was higher in developing countries, as developing countries purchased nearly $18 billion in other currencies. Valuation is also less of a constraint here. This suggests that the moves in this category are likely to be conscious decisions to diversify currency holdings, with EM countries accounting for roughly 90% of the recent change.
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