The share of US dollar reserves held by central banks fell to 59% – its lowest level in 25 years – during the fourth quarter of 2020, the International Monetary Fund (IMF) said in a recent blog, citing data from its Currency Composition of Official Foreign Exchange Reserves (COFER) survey.  

De-dollarisation is gathering momentum as big economies, especially Russia and China, are accelerating their efforts to ditch dollars for mutual trade and selling their US treasury bill holdings that have long been the store of value of choice for countries around the world.  

Russia sold over $100bn of its T-bill holdings in 2019 as part of reducing its exposure to US sanctions, switching part of that money into renminbi assets instead.

China remains heavily exposed to the greenback with just over $1 trillion invested in US treasuries as of January this year – more than any other country apart from Japan. That creates a problem, as China cannot reduce its exposure quickly without depressing the price of the bonds and hence the value of its investment.  

At the same time, Russia and China have taken to settling their mutual trade in their own national currencies or switching to the euro, which is increasingly competing with the dollar as a preferred currency for settlements in international trade.  

The two countries launched a three-stage plan several years ago to dump the dollar. In the first stage both countries vowed to cut back the proportion of their trade settled in dollars. In the second they sought to boost the renminbi’s role as an international settlement currency and Russia has already added the Chinese national currency to its gross international reserves (GIR) mix. China has given more than 30 countries renminbi access through bilateral swap agreements to encourage its use.  

The third and last stage of these efforts, still underway, aims to create alternative payment and messaging systems allowing countries to use home and partner currencies instead of dollars or euros to settle trade and investment deals. Both countries have launched their own payment system that is part of the effort to create an alternative to the US-owned SWIFT system that is the current international norm for money transfers, and it comes in the context of calls by western politicians to exclude Russia from the system.  

The IMF drilled into the necessarily slow-moving shift out of the dollar and into alternative currencies.  

“Our Chart of the Week looks at the recent data release from a longer-term perspective. It shows that the share of US dollar assets in central bank reserves dropped by 12 percentage points – from 71% to 59% – since the euro was launched in 1999 (top panel), although with notable fluctuations in between (blue line). Meanwhile, the share of the euro has fluctuated around 20%, while the share of other currencies including the Australian dollar, Canadian dollar and Chinese renminbi climbed to 9% in the fourth quarter (green line),” Serkan Arslanalp and Chima Simpson-Bell of the IMF said in a blog.

There is a certain amount of “noise” in the data, as during periods of US dollar weakness against major currencies, the US dollar’s share of global reserves generally declines since the US dollar value of reserves denominated in other currencies increases (and vice versa in times of US dollar strength) and the dollar has been weakening recently as capital flows reverse post-Trump and the US starts sending money out of the country again as investments, as opposed to net inflows during former US president Donald Trump's term in office.   

“The bottom panel shows that the value of the US dollar against major currencies (black line) has remained broadly unchanged over the past two decades. However, there have been significant fluctuations in the interim, which can explain about 80% of the short-term (quarterly) variance in the US dollar’s share of global reserves since 1999. The remaining 20% of the short-term variance can be explained mainly by active buying and selling decisions of central banks to support their own currencies,” the authors noted.  

“Turning to this past year, once we account for the impact of exchange rate movements (orange line), we see that the US dollar’s share in reserves held broadly steady. However, taking a longer view, the fact that the value of the US dollar has been broadly unchanged, while the US dollar’s share of global reserves has declined, indicates that central banks have indeed been shifting gradually away from the US dollar,” they said.  

Despite major structural shifts in the international monetary system over the past six decades, the US dollar remains the dominant international reserve currency and the IMF notes that any major change in the make-up of reserves of central banks around the world will take decades to achieve.