The International Monetary Fund has pointed to an ongoing gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments across the globe.
However, strikingly, the IMF shows the reduced role of the US dollar over the last two decades has not been matched by increases in the shares of the other “big four” currencies—the Euro, Yen, and Pound.
Rather, it has been accompanied by a rise in the share of what by non-traditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies, according to recent data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER).
The IMF noted that these non-traditional reserve currencies remain attractive to reserve managers because they provide diversification and relatively attractive yields, and have become increasingly easy to buy, sell and hold with the development of new digital financial technologies such as, automatic market-making and automated liquidity management systems.
One nontraditional reserve currency gaining market share is the Chinese renminbi, whose gains match a quarter of the decline in the dollar’s share.
The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalization, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency.
It is thus interesting to note that renminbi internationalization, at least as measured by the currency’s reserve share, shows signs of stalling out. The most recent data do not show a further increase in the renminbi’s currency share: some observers may suspect that depreciation of the renminbi exchange rate in recent quarters has disguised increases in renminbi reserve holdings. However, even adjusting for exchange rate changes confirms that the renminbi share of reserves has declined since 2022.
PRAU Honors Uganda’s Top Innovators at 9th Excellence AwardsSome experts have suggested that what has characterized as an ongoing decline in dollar holdings and rise in the reserve share of nontraditional currencies in fact reflects the behavior of a handful of large reserve holders.
Russia has geopolitical reasons to be cautious about holding dollars, while Switzerland, which accumulated reserves over the last decade, has reason to hold a large fraction of its reserves in euros, the Euro Area being its geographical neighbor and most important trading partner.
In a 2022 paper, IMF identified 46 “active diversifiers,” defined as countries with a share of foreign exchange reserves in nontraditional currencies of at least 5 percent at the end of 2020. These include major advanced economies and emerging markets, including most of the Group of Twenty (G20) economies. By 2023, at least three more countries (Israel, Netherlands, Seychelles) have joined this list.
IMF also found that financial sanctions, when imposed in the past, induced central banks to shift their reserve portfolios modestly away from currencies, which are at risk of being frozen and redeployed, in favor of gold, which can be warehoused in the country and thus is free of sanctions risk.
That work also showed that the demand for gold by central banks responded positively to global economic policy uncertainty and global geopolitical risk. These factors may lie behind the further accumulation of gold by a number of emerging market central banks. Before making too much of this trend, however, it is important to recall that gold as a share of reserves still remains historically low.
In summary, the international monetary and reserve system continues to evolve. The patterns highlighted earlier include—very gradual movement away from dollar dominance, and a rising role for the nontraditional currencies of small, open, well-managed economies, enabled by new digital trading technologies—remain intact.
