NOK NOK NOKing on COFER’s door

The IMF’s latest breakdown of $13tn worth of central bank foreign currency reserves caused a stir this autumn, given that the data indicated that the dollar’s share fell to a 30-year low of 56.3 per cent in the first half of 2025.

The dollar’s dip was actually mostly a valuation-driven mirage, as the IMF made clear. But there are clearly a lot of worries over the dollar’s role in the global economy, given . . . events in the US, and longer-standing concerns surrounding the greenback’s weaponisation, America’s debt trajectory etc.

The problem for central banks is that all the dollar’s main rivals have a lot of problems too. As a result, the euro’s share in FX reserves has also remained rooted around 20-21 per cent, according to the IMF’s COFER dataset. The share of the Chinese renminbi — often touted by certain geopolitical headbangers as the dollar’s main long term rival — remained at a puny 2.1 per cent, flat on the quarter and down on the year.

So where are central banks ploughing their reserves? The biggest currency winner of the past year is what COFER simply refers to as “other currencies”, which now accounts for $621bn of FX reserves — or 5.17 per cent of the total, more than sterling and approaching the yen’s level.

But what currencies are in this “other” bucket, which now account for over 40 per cent of all central bank reserve accumulation over the past two years?

Unfortunately, the IMF doesn’t break it down, but Steve Englander, Standard Chartered’s head of G10 FX strategy, has had a stab at estimating it by looking at correlations between currency movements and reported reserve market shares. Yes, this is a blunt approach, but probably the only one that works. It is, as Englander stresses, at least suggestive, if not definitive.

And it turns out that the most likely “other” winner is . . . the Norwegian krone.

Surprisingly, a number of statistical threads point to NOK as a major component of the ‘other currencies’ component of reserves. It stands out as the currency that is most correlated with changes in the USD value of other reserves. Changes in ZAR, SEK and NZD also have consistently high correlations with changes in the other currency reserves, and they are also frequently mentioned as reserve currencies. Our judgment is that correlations over 0.70 represent some presence in reserve portfolios.

Changes in SGD, COP, THB, PLN, IDR and KRW provide a second tier of correlation with changes in ‘other currencies’ at around 0.60. Some currencies in the second tier also probably have a significant presence in reserves portfolios, but we doubt that all of them do. Correlations for a couple of currencies have surged in the last few years, and we would see these as a watchlist of potential emerging reserve currencies. This would likely be a logical consequence of a desire of reserve managers to diversify out of USD but with unenthusiasm for majors.

This will be a surprise to many Norwegians, who these days spend (almost) as much time complaining about their currency’s seemingly baffling weakness as they do on skis.

It’s even become a major political issue, and a big headache for the central bank, as the krone’s weakness means higher import prices and faster inflation, meaning that interest rates have had to stay higher for longer than in most other developed economies.

The Norwegian krone’s apparently rising role in central bank reserves even blindsided Englander, as he admits:

The degree to which NOK stands out surprised us. For example, if we run regressions of changes in other reserves on changes in NOK and every other currency in our sample, NOK is always the more significant currency, whether over the last 28 or 14 quarters. We also created a geometrically weighted proxy currency consisting of NOK, SEK, NZD, ZAR, SGD and KRW, and then regressed changes in ‘other currencies’ on each of the candidate reserve currencies and this proxy. Only NOK was significant.

Our conclusion is that NOK probably punches above its weight in reserves. It is possible that reserve managers see owning some NOK as a hedge against rising oil prices. It is also possible that it is increasingly attractive as major currency credit ratings drift downward.

The oil hedge suggestion seems dubious to Alphaville, simply because the krone has in recent years become somewhat disconnected to the price of Norway’s biggest export (after smugness).

The Norwegian central bank’s latest quarterly report indicates that foreign investors haven’t increased their holdings over the time period that Englander looked at. So if central banks are buying in bulk then someone else must be selling.

It does makes a ton of sense that some central bank reserve managers will be looking to cautiously expand into smaller but still reasonably liquid currencies of pretty well-governed, fiscally strong countries like Norway and New Zealand. And sure, maybe even some South African rand on the margin, for diversification purposes.

Yet the dollar’s continued dominance is almost assured, as a classic macroeconomic example of the “least dirty shirt in the closet” phenomenon. There’s hardly anything else that could absorb the sums we’re talking about, after all (the entire Norwegian government bond market is only $58bn, for example).