The proportion of US dollar reserves held by central banks globally has decreased to 59 percent, marking a 25-year low as of the fourth quarter of 2020. This data, sourced from the International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) survey, sparks discussion about the evolving dynamics of the global economy. Some analysts suggest this shift reflects a gradual decline in the US dollar’s prominence in international transactions, as other currencies become increasingly viable alternatives for central banks. Significant shifts in reserve allocations can indeed ripple through currency and bond markets, underscoring the importance of understanding these trends.
Looking at the broader picture, data from the IMF highlights a notable trend since the introduction of the euro in 1999. The share of US dollar assets within central bank reserves has fallen by 12 percentage points, from 71 percent to 59 percent (as depicted in the chart below). While this long-term decline is evident, the trajectory hasn’t been linear; there have been fluctuations along the way. Conversely, the euro’s share has hovered around 20 percent, while the combined share of other currencies—including the Australian dollar, Canadian dollar, and Chinese renminbi—has risen to 9 percent by the end of 2020.
Exchange rate volatility plays a crucial role in shaping the currency composition of central bank reserve portfolios. The relative value fluctuations between different government securities also contribute, although their impact tends to be less pronounced due to the generally correlated movements of major currency bond yields. When the US dollar weakens against other major currencies, its share in global reserves typically decreases. This is because reserves held in other currencies become more valuable in US dollar terms, and the reverse occurs when the US dollar strengthens. These exchange rate dynamics are influenced by a multitude of factors, including differing economic trajectories between the US and other nations, variations in monetary and fiscal policies, and central banks’ foreign exchange operations.
The value of the US dollar against major currencies has remained relatively stable over the past two decades, as illustrated in the lower panel of the chart. However, significant interim fluctuations have occurred. These fluctuations can explain approximately 80 percent of the short-term (quarterly) variance in the US dollar’s share of global reserves since 1999. The remaining 20 percent of this short-term variance is largely attributable to active buying and selling decisions made by central banks in efforts to manage their own currencies.
Zooming in on the past year, after accounting for the effects of exchange rate movements, the US dollar’s reserve share remained largely stable. However, when considering the longer-term perspective, the consistent decline in the US dollar’s share of global reserves despite its relatively stable value suggests a gradual shift away from the US dollar by central banks. This long-term trend is important to note for anyone monitoring global finance and currency values, including individuals or businesses considering currency conversions, such as converting 20,000 euros in US dollars. Understanding these broader trends can provide context for currency movements and potential future shifts.
Looking ahead, some anticipate a continued decrease in the US dollar’s share of global reserves. This expectation is driven by emerging market and developing economy central banks seeking further diversification in their reserve currency holdings. Several countries, including Russia, have already publicly stated their intentions to diversify away from the US dollar.
Despite these significant structural changes in the international monetary system over the last half-century, the US dollar continues to be the dominant international reserve currency. As the data indicates, shifts in the US dollar’s status are likely to be gradual and unfold over the long term. These “glaciers of global finance,” as the IMF terms them, move slowly, reflecting the deep-seated role of the US dollar in the global economy.
