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(Repeats Aug. 21 column. The opinions expressed here are those of the author, a columnist for Reuters.)
By Jamie McGeever
LONDON, Aug 21 (Reuters) - The share of central banks' FX reserves held in dollars has fallen since Donald Trump was elected U.S. president, in large part due to exchange rate valuation changes. But U.S. isolationism on the global stage could hasten that decline.
As the Trump administration doubles down on its "America First" stance with its trade wars, currency wars, and deepening geopolitical rifts that could threaten actual wars, foreign central banks may be encouraged to reduce their dollar exposure.
Some countries, like Iran, Russia and Turkey, are already looking at ways of reducing their dependence on dollars, in part to avoid punitive U.S. sanctions via restrictions on their use of the global reserve currency.
Bluntly put, some countries fear the United States is using the dollar's reserve currency status as a stick to beat them with.
Global reserve currency status requires four things: size, stability, security, and liquidity. No other currency comes close to ticking all four boxes like the dollar, and it has been the world's reserve currency of choice for over 50 years.
It is on one side of 88 percent of all foreign exchange trades, according to the Bank for International Settlements, and is the currency in which internationally-traded commodities like oil, metals and gold are typically denominated. Analysts estimate over 80 pct of traded oil is priced in dollars.
But its omnipotence is not permanent.
Barry Eichengreen, professor of economics at the University of California, Berkeley, and a recognised authority on central banks and international reserves, outlines a scenario where the dollar's long-heralded decline gathers momentum.
He suggests the catalyst could be fraying diplomatic and military ties between the United States and its allies. Eichengreen estimates that the loss of the dollar's "security premium" could result in a 30 percentage point reduction in its share of reserves held by U.S.-dependent states.
That's a lot of dollar-deniominated assets, potentially $750 billion or more, up for sale if the United States continues down its isolationist path. And that's just from Washington's allies, never mind countries with more natural antipathy towards the United States.
GLOBAL RESERVES APPROACH RECORD LEVEL
International Monetary Fund data show that global reserves rose 8 pct to $11.59 trillion at the end of March from $10.71 trillion at the end of December 2016, just weeks after Trump was elected. Reserves are now approaching the record $11.98 trillion reached in 2014.