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The Pound and Swiss Franc built further on their shares of the global FX reserve basket during the first quarter and in a period blighted by extreme market volatility as well as more than $300 BN of central bank asset sales, according to newly released International Monetary Fund (IMF) data.
Sterling and the Swiss Franc were the only two major currencies to build further on their respective shares of the world’s currency reserves once the opening quarter’s gains and losses for exchange rates are taken into account.
The period was marked by extreme volatility and data released on Thursday suggested that it led the world’s central banks to sell some $370.75 BN worth of official reserve assets in order to defend their currencies following Russia’s February 24 invasion of Ukraine.
That led central bank reserve portfolios to shrink by an amount equal to more than three percent of the $12.05 trillion worth of allocated reserves that were known at the opening of the year, ultimately bringing the basket down to $11.68 trillion by the end of March.
Source: International Monetary Fund. 
But not all currencies were sold last quarter because the segment marked as “other” saw growth of 2.86% before adjustments for exchange rates, while Pound Sterling saw its share rise by 3.08% to $580.62 BN even after taking into account a -2.72% fall in Sterling.
That was enough to lift the Pound’s relative share of the overall basket from 4.80% to 4.97% during the period, although Sterling’s gains paled into insignificance when compared with the 25.35% currency adjusted increase in the Swiss Franc portion of the basket.
Central bank reserves denominated in Swiss Francs rose from $21.2 BN to $26.31 BN, which is a 25.35% increase after the more than one percent fall in the value of the Swiss Franc during the period is taken into account.
However, most other currencies that are separately itemised in the IMF data lost share of the basket after the first quarter’s currency moves are taken into account, with the Dollar and the Euro seeing the largest declines at -3.04 and -3.20% respectively.
Source: Pound Sterling Live, International Monetary Fund. 
It was almost inevitable ever since the Russian military first crossed into Ukraine that Dollars and Euros would have been sold in significant quantities because both currencies rose significantly against many smaller currencies and are more important than most others in global economic terms.
There is, however, a risk of the tables having turned against the other currencies and back in favour of the Dollar and Euro to an extent during the second quarter because periods of heavy Dollar or Euro selling would almost inevitably be followed later by a process of rebalancing.
Reserve rebalancing in this context would mean selling other currencies in order to restock the Dollar or Euro components of portfolios and the longer that market risk appetite remains shaky and the U.S. Dollar on its front foot, the more likely a rebalancing period would become.
Such a process could, in theory, explain how currencies like Pound Sterling, the Swiss Franc, Japanese Yen and Euro have all, at times, come to display almost ‘high beta’ or more volatile characteristics during the second quarter of the year.
Above: Selected global markets quotes and performances over various horizons. Source: Netdania Netstation.
Many other major currencies were sold to some extent already during the opening quarter although Chinese Renminbi’s share of the basket was almost as stable during the period as the currency itself, which tracked sideways over the quarter seemingly immune to the wider market volatility.
The first quarter of the year also heralded a further hawkish shift in Federal Reserve monetary policy that later went on to lift the U.S. Dollar to near two decade highs against a range of major currencies during the second quarter.
Dollar strength has only grown as a financial risk to many countries and currencies around the globe since the first quarter and is almost sure to have elicited further reserve selling from central banks during the period.
This is potentially an ongoing headwind for many currencies in the above table.
Above: U.S. Dollar Index shown at monthly intervals with Fibonacci retracements of 2002 downtrend indicating long-term technical resistances.
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