Foreign Reserve Currencies: Where Does the US Dollar Stand?
To buffer against dramatic swings in their domestic currency, most central banks around the world stockpile foreign-currency-denominated assets such as sovereign debt, cash and gold. For example, if a country’s currency declines in value, the central bank can sell some of its reserve assets and use the proceeds to strengthen their currency. By holding assets across multiple currencies, central banks can diversify their reserves and protect against overconcentration risk.
Since the late 1950s, global central bank reserve assets denominated in US dollars have made up the largest proportion of foreign reserves. According to the International Monetary Fund (IMF), global foreign asset stockpiles totaled nearly $11.5 trillion at the end of 2023—with nations reporting detailed holdings on $11.1 trillion, including currency reserve holdings. As shown in Exhibit 1, the US dollar constituted 58.4% of this amount (orange line). While this percentage is down from 71% in 1999, the absolute amount of dollars held is up big—from less than $1 trillion then to $6.7 trillion today.
Exhibit 1: US Dollars Remain Foremost Amongst Foreign Exchange Reserves
Source: FactSet and International Monetary Fund, as of 1/6/2024. Allocated foreign currency reserves of the world, yearly 1999 – 2023.
In our view, the dollar’s proportional decline is consistent with an increasingly connected global economy. Countries diversified their coffers for decades. Not by shying away from the dollar, but by adding more to reserves elsewhere. Importantly, despite chatter about China’s gold purchases and a potential BRICS-backed currency, there are few signs of countries broadly abandoning the dollar. The dollar has simply become a smaller slice of a much larger global pie.
USD Remains Dominant in International Transactions
In addition to maintaining a dominant share among foreign exchange reserves, the US dollar is the world’s preeminently traded currency. According to the Bank for International Settlements (BIS), over 88% of foreign exchange transactions involve the dollar on one side of the trade (Exhibit 2).
Exhibit 2: Most-Traded Currencies in 2022
Source: Bank for International Settlements; currency distribution of global foreign exchange market turnover (net-net basis), 12/31/2022. Survey is conducted every three years. Note: the chart below adds up to 200%, given all currency transactions have two sides.
Despite concerns over countries like Russia, China or the Kingdom of Saudi Arabia moving away from the dollar, there is no sign its losing market share. In fact, the US dollar modestly increased its share of foreign exchange transactions from 85% in 2010 to 88.4% in 20221. Additionally, about 50% of trade globally was invoiced in dollars in 2022, despite America accounting for only around 10% of global trade.2
What Could Happen if USD Loses Its Prominence?
First, it’s important to note the US receives no benefit from the dollar being a stop-over in trade. The government doesn’t receive a fee or tax on transactions, and for every buyer, there is a seller (and vice-versa). If the world moved toward a scenario where more currencies didn’t use the dollar as a stop-over, this could actually be an incremental benefit to the world economy, as it removes an extra step in completing a transaction.
At present, we think the dollar’s status as the world’s primary reserve currency appears stable for the foreseeable future. We believe the dollar’s persistent dominance is owed in part to the US’ huge economy, which has deep, liquid and open financial markets with strong legal institutions behind them. A shift to other currencies would likely happen glacially, and require massive changes in how global economies transact with one another.
Even if the dollar did lose its place as the largest reserve currency, we’re not convinced it would mean all that much. The last time a currency lost its reserve status was in the 1950s—when the dollar surpassed the British pound. At the time, fears and speculation ran rampant, but the overall effects were muted. UK Gilts didn’t collapse and the UK economy has grown. Today, Gilt yields are fairly close to US Treasurys—further evidence that reserve status doesn’t seem to provide much benefit.
Want to Dig Deeper
In this article, we reviewed fears over the US dollar’s status as the world’s primary reserve currency. For more analysis on why these fears are largely unfounded, you can read Fisher Investments’ MarketMinder article, “Deep Dive: Why We Think De-Dollarization Fears Are Faulty Logic.”
