• The dollar’s dominance is eroding against non-traditional reserve currencies, IMF economists said.
  • Currencies, including the krone and the won, account for three-quarters of the change against the greenback.
  • It comes as central bank reserve managers seek to diversify their portfolios.

The dollar reigned supreme as the world’s reserve for decades – but that story has changed, according to economists at the International Monetary Fund.

In fact, the dollar’s share of global foreign exchange reserves fell below 59% in the last quarter of last year, continuing a two-decade downward trend, according to an IMF blog post published on Wednesday. .

“The dollar has not become more dominant. It has not even maintained the dominance of previous years,” wrote economists Serkan Arslanalp, Barry Eichengreen and Chima Simpson-Bell.

The abandonment of the dollar is motivated by central bank interest in non-traditional reserves, notably the Swedish krona, the South Korean won and the Australian and Canadian dollars. Small-economy currencies that have not traditionally been held in reserve account for three-quarters of the dollar’s abandonment, IMF economists said.

At the same time, other traditional reserve currencies that have played an important international role – notably the euro, the yen and the pound – have not seen an increase at the expense of the dollar.

Three factors, they note, have contributed to the erosion of the dollar’s position: growth


liquidity

markets in non-traditional currencies, the rise of new financial technologies that make it cheaper to trade the currencies of smaller economies, and central banks’ hunt for higher-yielding bonds as US 10-year Treasury yields have decrease.

This gloomy view of the greenback’s outlook contradicts more bullish forecasts. A Morgan Stanley strategist, for example, recently said the dollar’s dominance is here to stay “a very long time” as China’s strict zero COVID policy tarnishes the yuan’s appeal.

The dollar’s dominance was also echoed by a US Treasury official who reinforced sentiment that the dollar will remain the world’s currency reserve.

But in April, the Bank of Israel revealed a new strategy for allocating its more than $200 billion in reserves over more than a decade. It will expand its holdings to include Canadian and Australian dollars, Chinese renminbi and Japanese yen. The share of the dollar at Israel’s central bank will then drop from 66.5% to 61%, according to Bloomberg.

Meanwhile, a senior IMF official warned in March that Western sanctions against Russia over its invasion of Ukraine could diminish the US dollar’s dominance. The war could also spur the adoption of cryptocurrencies and stablecoins, although there is still a regulatory vacuum, said Gita Gopinath.

In the case of non-traditional currencies overtaking the US dollar, IMF economists wrote: “All of this suggests that if dollar dominance comes to an end (a scenario, not a prediction), then the greenback could be taken down not by the main rivals of the dollar. but by a large group of alternative currencies.”