IMF Data Shows Decline in US Dollar Dominance

Recent data from the International Monetary Fund (IMF) points to an ongoing decline in the U.S. dollar’s share of allocated foreign reserves held by central banks and governments. Economists explained that reserve managers are attracted to nontraditional reserve currencies “because they provide diversification and relatively attractive yields, and because they have become increasingly easy to buy, sell, and hold with the development of new digital financial technologies.”

IMF Data Reveals Increasing Preference for Non-US Dollar Reserve Currencies

The International Monetary Fund (IMF) published a blog post on Tuesday, titled “Dollar Dominance in the International Reserve System: An Update,” authored by economists Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell.

They explained that the U.S. dollar, while still the leading global reserve currency, is gradually losing ground to nontraditional currencies, stating:

Recent data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) point to an ongoing gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments.

Despite the current strength of the U.S. dollar, stricter monetary policy, and geopolitical risks, signs of economic fragmentation and a shift towards alternative currencies are emerging, the economists described, reiterating that the IMF COFER data indicates a continuous decline in the dollar’s share of global reserves.

The economists pointed out that this reduction has not been offset by increases in the euro, yen, or pound, but rather by nontraditional currencies, such as the Australian and Canadian dollars, the Chinese renminbi, and others. While noting that the Chinese renminbi, while initially gaining market share, has seen its growth stall recently, potentially due to exchange rate depreciation, they detailed:

These nontraditional reserve currencies are attractive to reserve managers because they provide diversification and relatively attractive yields, and because they 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).

This shift away from the U.S. dollar is broad-based and includes many G20 economies, they further shared, adding that some countries, influenced by geopolitical considerations, are diversifying their reserves, including into gold, which is less vulnerable to sanctions.

Noting that “the international monetary and reserve system continues to evolve” and the diversification trend is driven by a variety of factors, including financial sanctions and geopolitical risks, with central banks responding by modestly shifting reserves, the economists concluded: “The patterns we highlighted earlier — 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.”

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