Dawn of the petrodollar

The IMF published yesterday its Currency Composition of Official Foreign Exchange Reserves (COFER). It shows how much of each currency countries hold in their foreign exchange reserves. As we know, major central banks hold US Dollars, Euros, and Yuan for the most part. But in the latest report, as you can see on the chart below, there is a significant jump in Swiss franc reserves. It is still minuscule compared to the other major currencies, but the jump is eye popping. But it gets better when we add the fact that the interest rate curve is CHF is negative up to 5 years. In other words, central banks or big money pools (hedge funds, SWF, endowments) are paying to keep their money in Swiss francs when they could be paid holding Euros or dollars. In the context of overall reserves, it is still a very low allocation, but these actions are telling us that the global reserve system is changing: more gold, more CHF, and less dollars and Euros. Now imagine that you’re the leader of a country that trades with the U.S. and receive a letter telling you that your products are subject to a 25%-40% tariff. You may sell less to the U.S. and sell more to other countries, which perhaps will pay you in their currency. Is the US taking a myopic approach to trade?

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