Dollar Dominance in the International Reserve System: An Update

IMF Blog, June 11, 2024

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The US dollar continues to cede ground to nontraditional currencies in global foreign exchange reserves but remains the preeminent reserve currency.
IMF COFER data point to an ongoing gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments.
The decline in the dollar’s share 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.
Instead, the dollar’s loss has been accompanied by a rise in the share of nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies.

Nontraditional reserve currencies are attractive because they:
- provide diversification;
- offer relatively attractive yields;
- 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).
Exchange rate fluctuations and valuation effects (changes in relative values of different government securities reflecting interest rate movements) can alter the currency composition of central bank reserve portfolios; these valuation effects tend to reinforce the overall trend but are generally smaller because major currency bond yields move together.

COFER reporting covers 149 reporting economies, which make up 93 percent of global FX reserves; non-reporters therefore represent only a very small share of global reserves.
Concerns that non-reporting by countries seeking to de-dollarize could bias COFER results are acknowledged but mitigated by the large coverage of COFER reporting.

The Chinese renminbi has gained market share as a nontraditional reserve currency, with its gains matching a quarter of the decline in the dollar’s share.
Chinese policy measures to promote renminbi internationalization mentioned include: development of a cross-border payment system, extension of swap lines, and piloting a central bank digital currency.
The most recent data do not show a further increase in the renminbi’s currency share; adjusting for exchange rate changes confirms that the renminbi share of reserves has declined since 2022.

Some argue that a handful of large reserve holders drive the observed shift (examples cited: Russia and Switzerland).
- Russia has geopolitical reasons to be cautious about holding dollars.
- Switzerland, having accumulated reserves over the last decade, holds a large fraction of reserves in euros due to geographic and trade ties.
Excluding Russia and Switzerland from the COFER aggregate, using data published by their central banks from 2007 to 2021, shows little change in the overall trend—indicating the movement away from the dollar is broad-based.
In the 2022 paper, 46 “active diversifiers” were identified, 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 of active diversifiers.

Historical evidence indicates that financial sanctions, when imposed, induced central banks to shift modestly away from at-risk currencies toward gold, which can be warehoused domestically and is free of sanctions risk.
Demand for gold by central banks responded positively to global economic policy uncertainty and global geopolitical risk, potentially explaining further accumulation of gold by some emerging market central banks.
Gold’s share of reserves, however, still remains historically low.

The international monetary and reserve system continues to evolve.
The patterns identified earlier remain intact:
- 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.

Source: Dollar Dominance in the International Reserve System: An Update — Serkan Arslanalp, Barry Eichengreen, Chima Simpson-Bell, June 11, 2024.