The proportion of US dollar reserves held by central banks globally has decreased to 59 percent in the fourth quarter of 2020, marking the lowest level in 25 years. This data, sourced from the International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) survey, suggests a shifting landscape in international finance. Analysts propose that this decline reflects a broader trend of the US dollar’s diminishing influence in the global economy, facing increased competition from alternative currencies in international transactions managed by central banks. These shifts in reserve allocations, when substantial, can have considerable impacts on both currency and bond markets.
Looking at a wider timeframe, data reveals a significant 12 percentage point drop in the share of US dollar assets within central bank reserves since the introduction of the euro in 1999. At that time, the US dollar constituted 71 percent of reserves. While there have been fluctuations, the overall trend shows a decrease to the current 59 percent (as illustrated in the chart below). Conversely, the euro’s share has remained relatively stable at around 20 percent. Interestingly, other currencies, including the Australian dollar, Canadian dollar, and Chinese renminbi, have collectively seen their share rise to 9 percent in the same period. This diversification indicates a move beyond the traditional dominance of the US dollar and euro.
Exchange rate volatility plays a crucial role in the currency composition of central bank reserve portfolios. Fluctuations in the value of government securities also contribute, although their impact is generally less pronounced due to the correlated movements of major currency bond yields. During periods when the US dollar weakens against other major currencies, its share in global reserves typically falls. This is because the dollar value of reserves held in other currencies increases, and the reverse occurs 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 stability of the US dollar’s value against major currencies over the last two decades is notable. Despite this broad stability, significant 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 largely attributed to central banks’ active trading decisions aimed at managing their own currencies.
In the past year, after adjusting for the effects of exchange rate movements, the US dollar’s reserve share has remained relatively stable. However, when viewed over a longer period, the consistent decline in the US dollar’s share of global reserves, despite its relatively unchanged value, strongly suggests a gradual shift away from the US dollar by central banks.
Looking ahead, some analysts 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 greater diversification in their reserve currency holdings. Certain countries, such as Russia, have already publicly stated their intentions to reduce their reliance on the US dollar.
Despite these structural shifts in the international monetary system over the last half-century, the US dollar continues to be a dominant international reserve currency. However, as data indicates, any fundamental changes to the US dollar’s status are likely to be a long-term evolution, rather than a rapid transformation, reflecting the slow but persistent adjustments in global financial preferences.
