US dollar’s share of global central bank reserves declines to lowest in 25 years

The share of US dollar reserves held by central banks around the world hit a 25 year low during the fourth quarter of 2020, according to the International Monetary Fund.

US dollar assets in central bank reserves dropped to 59 per cent from 60.5 per cent in the third quarter of 2020, while the share of the euro accounts for about 20 per cent.

The share of other currencies, including the Australian dollar, Canadian dollar and Chinese yuan, climbed to 9 per cent in the fourth quarter, IMF economists Serkan Arslanalp and Chima Simpson-Bell said in a blog post.

“This partly reflects the declining role of the US dollar in the global economy in the face of competition from other currencies used by central banks for international transactions,” they said, citing the fund’s Currency Composition of Official Foreign Exchange Reserves survey.

If the shifts in central bank reserves are large enough, they can affect currency and bond markets.

Governments have pumped more than $16 trillion of fiscal stimulus into the global economy since the outbreak of the Covid-19 pandemic just over a year ago. The stimulus has been backed by about $9tn in monetary measures from central banks as they attempted to put a floor under a global economy that suffered its worst recession since the 1930s.

Central banks also use gold reserves as a store of value in times of volatility. Gold purchases by central banks slowed sharply by 59 per cent in 2020 to 273 tonnes, the World Gold Council said in its

Gold Demand Trends report in January. However, official gold reserves grew by 44.8 tonnes during the final quarter of last year.

“Exchange rate fluctuations can have a major impact on the currency composition of central bank reserve portfolios,” Mr Arslanalp and Mr Simpson-Bell said. “Changes in the relative values of different government securities can also have an impact, although this effect would tend to be smaller since major currency bond yields usually move together.”

US dollar exchange rates can be influenced by several factors, including diverging economic paths between the US and other economies, differences in monetary and fiscal policies, as well as foreign exchange sales and purchases by central banks, they pointed out.

The greenback’s share of global reserves will continue to fall as emerging market and developing economy central banks seek further diversification of the currency composition of their reserves, according to the lender.

It cited the example of Russia, which has already announced its intention to diversify the composition of its currency reserves.

Despite major structural shifts in the international monetary system over the past six decades, the IMF said it expects the US dollar to “remain the dominant international reserve currency”.

Governments have pumped more than $16tn of fiscal stimulus into the global economy since the outbreak of the pandemic