The proportion of US dollar reserves held by central banks globally has decreased to 59 percent, marking the lowest point in 25 years. This data, from the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey for the fourth quarter of 2020, suggests a shift in the global financial landscape. Some analysts interpret this as an indication of the US dollar’s diminishing influence in the international economy, facing increased competition from alternative currencies in central bank transactions. Significant shifts in central bank reserve allocations can have considerable impacts on both currency and bond markets.
This analysis examines the recent IMF data release within a broader historical context. As the chart below illustrates, the share of US dollar assets in central bank reserves has fallen by 12 percentage points since the introduction of the euro in 1999, dropping from 71 percent to 59 percent (as depicted in the top panel). This decline, represented by the blue line, has occurred with some fluctuations over the intervening years. Concurrently, the euro’s share has remained relatively stable at around 20 percent. Notably, 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).
Central Bank Reserve Composition: A long-term view of the shift away from the US dollar, showing fluctuations since the euro’s inception in 1999.
Exchange rate volatility is a crucial factor influencing the currency composition of central bank reserve portfolios. Changes in the relative values of different government securities can also play a role, although their impact tends to be less significant as major currency bond yields typically move in tandem. Periods of US dollar depreciation against major currencies generally correlate with a decrease in the US dollar’s share of global reserves. This is because the US dollar value of reserves held in other currencies increases during dollar weakness, and conversely, decreases when the dollar strengthens. Several factors can influence US dollar exchange rates, including differing economic trajectories between the United States and other nations, variations in monetary and fiscal policies, and central banks’ foreign exchange activities.
The lower panel of the chart reveals that the value of the US dollar against major currencies (black line) has remained largely consistent over the last two decades. However, substantial interim fluctuations have occurred. These fluctuations can 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 primarily attributable to central banks actively buying and selling currencies to manage their own currency values.
Looking at the past year, after adjusting for the effects of exchange rate movements (orange line), the US dollar’s reserve share appears broadly stable. However, a longer-term perspective reveals that despite the US dollar’s relatively unchanged value, its declining share of global reserves suggests a gradual diversification away from the US dollar by central banks.
Many analysts anticipate a continued decrease in the US dollar’s share of global reserves as central banks in emerging markets and developing economies pursue further diversification of their reserve currency holdings. Some countries, such as Russia, have already publicly stated their intentions to reduce their dollar holdings.
Despite significant structural changes in the international monetary system over the last six decades, the US dollar remains a dominant international reserve currency. As this analysis indicates, any fundamental shifts in the US dollar’s status are likely to be a gradual, long-term process, unfolding over many years.
