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Israeli central bank adds Chinese Yuan for first time ever, cuts back on US Dollar

Chinese Yuan (Karl Baron/Flickr)
April 22, 2022

The Bank of Israel, which serves as Israel’s central bank, has added the Chinese Yuan to its reserve currency holdings for the first time ever, while at the same time reducing its holdings of U.S. Dollars and European Union Euros.

Bloomberg reported on the Israeli banking decision on Wednesday, describing it as the biggest change to its balance of reserve currencies in over a decade. While the Bank of Israel previously only held Dollars, Euros and Pounds, it will now take on Yuan as well as Japanese Yen, and Australian and Canadian Dollars.

The U.S. Dollar will go from representing 66.5 percent of the bank’s reserve currency holdings to 61 percent. The share of Euros will fall from 30 to 20 percent. The share of Pounds will almost double to about five percent.

The Japanese Yen will now also represent about five percent of the bank’s holdings, while the Canadian and Australian Dollars will each represent 3.5 percent of the share. The Chinese Yuan will comprise about two percent of the bank’s currency holdings.

Bank of Israel Deputy Governor Andrew Abir said the decision to change the makeup of the bank’s currency holdings is part of a change in its “whole investment guidelines and philosophy.”

“We need to look at the need to earn a return on the reserves that will cover the costs of the liability,” Abir said.

The Bank of Israel’s decision to cut back on U.S. Dollars and diversify its currency holdings comes as the Dollar is losing favorability as a global reserve currency. Bloomberg reported a recent International Monetary Fund (IMF) survey found that the share of U.S. Dollars held in foreign-exchange reserves around the world has fallen to its lowest percentage since 1995. The Euro, Pound and Yuan have largely benefitted from this shift in global reserve currency holdings.

According to Bloomberg, China has pushed for the Yuan to play a bigger role as a global reserve currency but its progress has been slowed by the currency’s limited convertibility and tight management by Chinese authorities.

Still, the Yuan has been garnering greater attention around the world in recent months. In March, the Wall Street Journal reported Saudi Arabia began talks about selling some of its oil to China in Yuan. The move would signal a major shift, as Saudi Arabia has exclusively relied upon the U.S. Dollar for global oil sales since 1974. This historic exclusivity has played a key role in ensuring the Dollar’s value.

“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security told the Wall Street Journal. “If that block is taken out of the wall, the wall will begin to collapse.”