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, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey.
Some analysts say this partly reflects the declining role of the US dollar in the global economy, in the face of competition from other currencies used by central banks for international transactions.
If the shifts in central bank reserves are large enough, they can affect currency and bond markets.
The share of US dollar assets in central bank reserves dropped by 12 percentage points—from 71 to 59 percent—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 percent, while the share of other currencies including the Australian dollar, Canadian dollar, and Chinese renminbi climbed to 9 percent in the fourth quarter (green line).
Exchange rate fluctuations can have a major impact on the currency composition of central bank reserve portfolios. Changes in the relative values of different government securities can also have an impact, although this effect would tend to be smaller since major currency bond yields usually move together.
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).
In turn, US dollar exchange rates can be influenced by several factors, including diverging economic paths between the United States and other economies, differences in monetary and fiscal policies, as well as foreign exchange sales and purchases by central banks. (From IMF Blog)
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