United States dollar is gradually losing its grip as the world’s largest reserve currency as non-traditional reserve currencies are experiencing more patronage by central banks.
The report published by Serkan Arslanalp, Barry Eichengreen and Chima Simpson-Bell was titled, ‘Dollar Dominance in the International Reserve System: An Update”.
According to the report, the US dollar continues to cede ground to non-traditional currencies in global foreign exchange reserves, however, it remains the pre-eminent reserve currency.
The report said, “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.
“Strikingly, the reduced role of the US dollar over the last two decades has not been matched by increases in the shares of the other ‘big four’ currencies—the euro, yen, and pound.
“Rather, it has been accompanied by a rise in the share of what we have called nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies”.
The report said nontraditional reserve currencies are attractive to central banks 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 like automatic market-making and automated liquidity management systems.
The report said, “One nontraditional reserve currency gaining market share is the Chinese renminbi, whose gains match a quarter of the decline in the dollar’s share.
The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalization, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency.
“It is thus interesting to note that renminbi internationalization, at least as measured by the currency’s reserve share, shows signs of stalling out.
“Some have suggested that what we have characterized as an ongoing decline in dollar holdings and rise in the reserve share of nontraditional currencies in fact reflects the behaviour of a handful of large reserve holders”.
