The dollar, while continuing to lose ground to non-traditional currencies in global foreign exchange reserves, remains the primary reserve currency, according to a new blog post from the International Monetary Fund (IMF).
The international financial institution notes that the dollar’s predominance in the global economy remains evident. This is attributed to the strength of the U.S. economy, the tightening of monetary policy, and escalating geopolitical risks, which have collectively bolstered the value of the greenback.
However, the IMF suggests that economic fragmentation and the potential reorganization of global economic and financial activities into distinct blocs might prompt some countries to adopt and hold other international reserve currencies.
Interestingly, the decline in the dollar’s share over the past two decades has not been offset by increases in the shares of other major currencies like the euro, yen, and pound. Instead, the share of “non-traditional reserve currencies” has grown. These include the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singapore dollar, and Nordic currencies.
Recent IMF data from the Currency Composition of Official Foreign Exchange Reserves (COFER) report show a continued gradual decline in the dollar’s share of central banks’ foreign exchange reserves.
Non-traditional reserve currencies are attractive to reserve managers due to their diversification benefits and relatively strong returns, the Bretton Woods institution notes. Additionally, advancements in digital financial technologies, such as Automated Market Makers and automated liquidity management systems, have made these currencies easier to buy, sell, and hold.
This recent trend is particularly striking given the strength of the dollar, which indicates that private investors have gravitated towards dollar-denominated assets, the IMF asserts.
At the same time, this observation highlights that exchange rate fluctuations can independently affect the currency composition of central bank reserve portfolios. The relative value changes of various public securities, reflecting interest rate fluctuations, can also have an impact, though this tends to be minor since bond yields in major currencies usually follow similar trajectories.
Over the past two decades, the fact that the dollar’s value has remained largely stable while its share in global reserves has decreased suggests that central banks are gradually moving away from the dollar, the Washington-based international financial institution emphasizes.
