In short, yes. We hear lots about the diminishing power of the US and its currency, but a deeper analysis shows that US economic exceptionalism remains strong.
It is true that the US dollar (USD), still by far the largest reserve currency held by central banks, keeps losing share ever so slowly against a mix of other reserve currencies as central banks diversify their holdings of dollar-denominated assets to assets denominated in other currencies. And they’re also adding to their holdings of gold. But the pace of that loss is glacial, and the alternatives not particularly attractive.
The share of USD denominated foreign exchange reserves – assets that central banks other than the US Federal Reserve (Fed) hold that are denominated in USD – declined to 58% of total exchange reserves in Q2, the lowest share since 1995, according to the International Monetary Fund’s (IMF) data.
Source: Wolf Street
Over the past 10 years, the USD’s share has dropped by about 8%, from 66% in 2015 to 58% in 2024 so far. If this pace continues, the dollar’s share will fall below 50% in 10 years.
But the long view back to the 1960s shows that the USD’s share of global reserve currencies was a lot lower in the 1970s and 1980s. The share collapsed from 85% in 1977 to 46% in 1991, as inflation exploded in the US in the 1970s and into the 1980s, and the world lost confidence in the Fed’s willingness to get this inflation under control.
By the 1990s, with inflation on decline for a decade, confidence returned, and central banks loaded up on USD denominated assets again, until the euro came along, which combined the major European reserve currencies into one, making it an alternative.
The following chart shows the share of the USD at year end (from 1965 onwards) except in 2024, for which we use the Q2 figure.
Source: Wolf Street
In USD terms, central banks held foreign exchange reserves in all currencies of $12.35 trillion in Q2. Of this amount, holdings of USD denominated assets dipped to $6.68 trillion.
These USD denominated assets include US Treasury securities, US agency securities, US government-backed MBS, US corporate bonds, even US stocks, held by central banks other than the Fed.
Excluded are assets denominated in a central bank’s local currency, such as the Fed’s holdings of Treasury securities, and the ECB’s holdings of euro-denominated assets.
So it appears that central banks have not been “dumping” their dollar-assets – in dollar amounts, their dollar-holdings haven’t changed much and are not far off the peak in 2021. But as overall foreign exchange reserves grow, they’re taking on assets denominated in many alternative currencies, and the dollar’s share of the total declines.
Source: Wolf Street
What about the alternatives?
The euro is the perennial number 2, with a share that has for years been stuck at around 20%. In Q2, the share was 19.8% (blue line in the chart below).
The major alternatives to the USD and the EUR, the “non-traditional reserve currencies,” as the IMF calls them, are the colourful scraggly lines at the bottom of the chart. These include the Chinese RMB (red). When the IMF added the RMB to its basket of currencies backing the Special Drawing Rights (SDR) in 2016, the currency was seen as the coming threat to the dominance of the USD as global reserve currency. China is the second largest economy in the world, and it makes sense that it would have a major reserve currency.
But that has turned out to be not the case. The RMB is handicapped by capital controls and convertibility issues. Central banks are wary of holding RMB denominated assets. And it plays only a small and declining role as a reserve currency. Even the Australian dollar (brown) now has a larger share than the RMB.
Source: Wolf Street
Percentage share of major foreign exchange reserves in Q2 that the IMF’s data lists separately:
- Japanese yen, 5.6% (purple), third largest reserve currency behind USD and EUR.
- British pound, 4.9% (blue), fourth largest reserve currency.
- “All other currencies” combined, 4.2% (yellow).
- Canadian dollar, 2.7% (green).
- Australian dollar, 2.2% (brown).
- Chinese renminbi, 2.1% (red).
- Swiss franc, 0.2% (purple).
Gold bullion is not a foreign exchange reserve, so its excluded from the data above. It’s a central bank reserve asset. So it doesn’t really fit into this discussion of foreign exchange reserves. But it can replace foreign exchange reserves, such as Treasury securities, on a central bank balance sheet. And it has been doing that. Over the past decade, central banks have been building up their gold holdings.
They’re currently holding 1.16 billion troy ounces, according to the IMF; that’s $3.1 trillion in gold, compared to $12.35 trillion in foreign exchange reserves:
Source: IMF
