Recent focus shifts to dominance of US dollar
Date
1/19/2025 7:10:01 AM
(MENAFN) Recent focus has shifted to the dominance of the US dollar and its crucial role in the global economy, driven by the strength of the US economy, tighter monetary policies over the last two years, and rising geopolitical risks. Despite this, there are signs of economic fragmentation and the potential for reorganizing global economic and financial activity into distinct blocs, encouraging some countries to diversify their foreign reserve holdings by using alternative international currencies.
Data from the International Monetary Fund (IMF) shows a continued gradual decline in the dollar’s share of global foreign reserves. Interestingly, this decrease has not been offset by a rise in the shares of the traditional "Big Four" currencies (euro, yen, and pound sterling) but rather by an increase in unconventional reserve currencies, such as the Australian dollar, Canadian dollar, Chinese yuan, South Korean won, Singapore dollar, and Nordic currencies. This trend, previously noted in an IMF study and blog, highlights the growing popularity of these currencies for diversification and potential returns.
The ease of acquiring these unconventional currencies has been boosted by new digital financial technologies, such as automated market-making and liquidity management systems. While this trend is surprising given the dollar’s strength, it signals a shift among private investors towards assets denominated in these alternative currencies. Exchange rate fluctuations and interest rate movements further influence the formation of reserve portfolios, with the overall trend suggesting a gradual movement away from the US dollar by central banks.
Notably, tests of statistical data show no accelerated decline in the dollar’s share of reserves, contradicting claims that US financial sanctions have driven this shift. Despite some underreporting by certain countries, the IMF's database covers 149 reporting economies that account for 93% of global foreign reserves, indicating the broad scope of the trend. Among the unconventional reserve currencies, the Chinese yuan stands out, with its market share growth matching a significant portion of the dollar’s decline. The Chinese government is actively promoting the yuan's internationalization through cross-border payment systems, currency swap agreements, and the introduction of a digital currency.
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