Relative Numeraire Risk and the Currency Allocation of Sovereign Portfolios

Abstract

Abating dominance of the US Dollars (US$) as an asset class notwithstanding, the truly structural question is whether it ought to remain the universal numeraire by which sizes and risk-return performances of international reserves and sovereign wealth funds (henceforth sovereign portfolios) are measured and examined in the international arena. Compelling though a normative case may be for optimising the sovereign portfolio’s currency allocation (benchmark) against risk-return objectives as measured in the relevant local numeraire be it the sovereign domestic currency unit, an index of international import/liability exposures, or any amalgam of anticipated future cross-border transaction needs, fact remains that professional analysts and observers in practice anchor sovereign portfolio analytics in some monetary quanta, which for the foreseeable future will be none other than the US$.