Central banks globally are adjusting their reserve holdings, and recent data reveals a notable trend: the declining share of the US dollar. According to the International Monetary Fund (IMF), the proportion of US dollar reserves held by central banks fell to 59 percent in the fourth quarter of 2020. This marks the lowest point in 25 years, as detailed in the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey. This shift sparks discussions about the evolving role of the US dollar in the international economic landscape, particularly as other currencies become more prominent in international transactions. For those tracking global finance, understanding these changes is crucial, especially when considering the impact on currency values – even down to understanding something as seemingly simple as the exchange rate of 20 Euro Cent In American Currency at any given time. Significant shifts in central bank reserves can indeed ripple through currency and bond markets.
To gain a clearer perspective on this evolving situation, let’s examine the long-term trends revealed by the latest data.
Since the introduction of the euro in 1999, the share of US dollar assets in central bank reserves has decreased by 12 percentage points, dropping from 71 to 59 percent (as shown in the top panel of the chart above). While this decline has not been linear and has seen fluctuations (represented by the blue line), the overall trend is downwards. In contrast, the euro’s share has generally hovered around 20 percent. Interestingly, the combined share of other currencies, including the Australian dollar, Canadian dollar, and Chinese renminbi, has risen to 9 percent in the same period (indicated by the green line). This diversification suggests a strategic move by central banks to broaden their reserve portfolios beyond traditional choices.
Exchange rate volatility plays a significant role in shaping the currency composition of central bank reserves. Fluctuations in the relative values of government securities also contribute, although their impact is typically less pronounced due to the correlated movements of major currency bond yields. When the US dollar weakens against other major currencies, its share in global reserves tends to decrease. This is because the dollar value of reserves held in other currencies increases, and conversely, when the dollar strengthens, the opposite occurs. Several factors can influence US dollar exchange rates, such as differing economic trajectories between the US and other nations, variations in monetary and fiscal policies, and central banks’ foreign exchange activities. For businesses and individuals alike, these fluctuations highlight the importance of understanding currency conversion, whether dealing with large reserve amounts or simply calculating the equivalent of 20 euro cent in American currency for everyday transactions when traveling or engaging in international commerce.
The bottom panel of the chart provides further insights by showing the value of the US dollar against major currencies (black line) over the last two decades. While the overall value has remained relatively stable, the interim period has seen considerable fluctuations. These fluctuations alone account for 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 short-term variance is largely attributed to central banks’ active decisions to buy or sell currencies to manage their own currency values and reserve compositions. The orange line in the chart further clarifies this by illustrating the US dollar’s share in reserves adjusted for exchange rate movements. This adjusted view reveals that over the past year, the US dollar’s share has remained broadly stable when exchange rate effects are removed.
However, when we consider the longer-term perspective, the picture becomes clearer. Despite the US dollar’s value remaining broadly unchanged over two decades, its declining share of global reserves indicates a gradual shift away from the dollar by central banks. This suggests a deliberate strategy of diversification rather than just the effect of exchange rate movements.
Looking ahead, many analysts anticipate a continued decrease in the US dollar’s share of global reserves. This expectation is fueled by emerging market and developing economy central banks seeking further diversification of their reserve currency holdings. Some countries, like Russia, have already publicly stated their intentions to reduce their reliance on the US dollar.
Despite these shifts and structural changes in the international monetary system over the past six decades, it is crucial to remember that the US dollar still holds its position as the dominant international reserve currency. As the IMF’s analysis suggests, any fundamental changes to the US dollar’s status are likely to be gradual and unfold over the long term. Understanding these trends, from the macro level of global reserve shifts down to the micro level of understanding the current value of 20 euro cent in American currency, is essential for navigating the complexities of the modern global financial system.
