There has been a growing trend towards more disclosure by central banks on the currency denomination of their foreign exchange reserves. This column introduces a new comprehensive dataset on the currency composition of foreign exchange reserves of 64 economies from 1996 to 2023. It shows that the US dollar and the euro remain the dominant global reserve currencies, but their significance has diminished in recent years. It also finds a reshuffling on foreign exchange reserves following Russia’s war in Ukraine, with Ukraine increasing US dollar reserves and Russia increasing renminbi reserves.
For many decades, research on the currency denomination of foreign exchange (FX) reserves held by central banks has been hampered, if not made impossible, by the secrecy of such information. In the last decade or two, however, this historically inherited habit – or norm – in central banking has begun to gradually break down. Our own recent work is part of this ‘transparency trend’ toward more disclosure, where central banks seem less anxious to provide information regarding shares of foreign exchange reserves by currency in their official periodic publications.
The gains in momentum toward disclosure relate to the transition from ‘monetary mystique’ (Goodfriend 1986) in the 1970s and 1980s toward an accountable and transparent policy framework such as inflation targeting since the 1990s and ‘forward guidance’ since the Global Crisis (GFC) of 2007-2009. Nevertheless, many central banks across the world still prefer to keep confidentiality regarding the denomination of their foreign exchange reserves to avoid unwanted pressure from foreign exchange market speculation.
Limited data availability for researchers
For the sake of brevity, we refer to some key literature rather than reviewing it. 1 It is important to highlight the main drivers of the currency denomination of foreign exchange reserves. These can broadly be separated into transaction motives (e.g. currency pegs, trade-related factors, and public or private domestic debt structure in terms of foreign currencies), portfolio optimisation motives (e.g. higher but riskier versus lower but safer returns), and geopolitical motives (e.g. military alliances and geopolitical distance). 2
Published findings on the share of world currencies in foreign exchange reserves typically rely on three sources: (1) the IMF’s International Financial Statistics (IFS), which provide aggregate reserve holdings data for most countries globally without revealing currency denominations; (2) the IMF’s Currency Composition of Foreign Exchange Reserves (COFER) database, which offers aggregated data on reserves by major currencies without mention of individual country holdings; and (3) national data based on individual country disclosures of reserve managing authorities as part of central bank annual reports.
Our own dataset and key findings from its analysis
In a recent policy brief (Laser et al. 2024), we present a new comprehensive dataset on the currency compositions of foreign exchange reserves. 3 Like most similar datasets, it is an unbalanced panel, since different countries start or end disclosure in different years. At present, this is the most up-to-date of such datasets publicly available, covering a time period from 1996 to 2023 (i.e. 28 years for some of the countries in the dataset) and providing a comprehensive geographic coverage of 64 economies, including the euro area. The dataset is also unique in that it contains country-specific shares in foreign exchange reserves for seven major international currencies: the US dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Australian dollar (AUD), and the Chinese yuan or renminbi (CNY), and an eighth category covering other currencies. 4 Other datasets, such as those we cited, cover the so-called ‘Big Four’ currencies, namely, the USD, EUR, JPY, and GBP. The following table shows the countries included in the dataset.
Table 1 Sample composition by region and by split into advanced and emerging economies
Note: The classification into advanced and emerging economies follows the IMF’s World Economic Outlook classification in 2016. Asterisks mark euro area countries as of the time of writing.
We find that while the US dollar and the euro remain the dominant global reserve currencies, their significance has diminished as countries have begun diversifying their foreign exchange reserves following the global crisis. Some currencies that have not been used historically as reserves, notably the renminbi, have gained prominence, 5 but the renminbi is very far from becoming comparable to the dominant share of the US dollar, let alone challenging to replace it. The trends we uncover do not diverge from what related research has also confirmed. This builds up a consensus highlighting that while we have been observing a gradual fragmentation of the international monetary system since the creation of the euro or at least since the global crisis, the US dollar is likely to retain its leading role for the next decade. 6
At longer horizons, it will all depend on whether the ongoing geo-economic shifts suggesting a possible move toward a more varied, or ‘multipolar’, reserve currency landscape will be supported by a gradual build-up of credibility of the new reserve currency. While many politicians envy the ‘exorbitant privilege’ of the US as issuing country of the US dollar since about WWII and regard it as unjust, it also implies an ‘exorbitant duty’ (e.g. Gourinchas and Rey 2022, Dooley et al. 2022). This duty, or responsibility, consists in maintaining the international monetary system by providing a safe asset with deep and liquid global markets that facilitates payments for trade of goods, services, and assets and in this way underpins the economic interdependency and everyday functioning of our ‘global village’.
What do we learn from our dataset: Two insights
The interested reader is referred to our policy brief (Laser et al. 2024) to obtain more details and visualisations on the theme. In what follows, we here extract just two insights from the dataset and interpret them briefly through the lens of economic intuition.
Insight 1: Reserve compositions are heterogeneous across world regions
Figure 1 reports the evolution of the US dollar (USD) share in international reserves by geographical region. Countries in South America and the euro area tend to hold the largest US dollar shares, followed by Asia and Africa. US dollar shares in Australia and Oceania are among the lowest in the sample (only US dollar shares in non-euro area countries in Europe are lower).
Figure 2 visualises the evolution of the euro share. Non-euro area countries and North America on average hold the highest shares of euro, followed by Australia and Oceania. African and Asian countries hold comparable shares of euro, whereas South American countries on average have the lowest levels of euro shares of all regions considered.
Figure 3, then, illustrates the evolution of the renminbi share. Considering recent years, Australia and Oceania and Asia hold on average the highest shares of renminbi, whereas euro area countries and North America exhibit the lowest shares of renminbi. Substantial growth in renminbi shares in recent years can be observed in South America and Asia.
Figure 1 Dynamics of US dollar shares in international reserves by country groupings
Note: For the definition of the country groups, see the note to Table 1 or our BOFIT Policy Brief 2024/6. The panels report unweighted averages by region. Countries issuing the currency under consideration are excluded from the calculations. For that reason, North America includes only Canada, when USD shares are displayed – as is the case here, in Figure 1 – and in this sense is not representative.
Figure 2 Dynamics of euro shares in international reserves by country groupings
Note: Same as to Figure 1. North America now includes the US and Canada.
Figure 3 Dynamics of renminbi shares in international reserves by country groupings
Note: Same as to Figure 1. North America now includes the US and Canada.
To sum up, the data show that the currency denomination of foreign exchange reserves is highly heterogeneous. US dollar dominance in international reserves, for instance, is greatest in South America, Asia, and Africa, while the euro traditionally takes up a large share in international reserves in non-euro area European countries. These patterns are most likely driven by underlying trade and financial exchange patterns, rationalised mainly by geographic proximity and historical links.
Insight 2: Wars and conflicts impact the composition of reserves
Figure 4 Dynamics of the currency composition of international reserve holdings of Ukraine
Figure 5 Dynamics of the currency composition of international reserve holdings of Russia
The second insight from our new dataset that we would like to highlight, leaving the topic for further investigation, is related to the effects of Russia’s war in Ukraine and the subsequent sanctions, geopolitical fragmentations, and realignments in trade and finance blocs and, hence, ultimately in foreign exchange reserve shares. Comparing the left-hand side panels in Figures 4 and 5 illustrates a trend of mirror image dynamics in Ukraine and Russia when it comes to accounting for the share of the US dollar. After the annexation of Crimea by Russia in 2014, Ukraine has increased its US dollar share in foreign exchange reserves from about 60% in 2014 to above 80% in 2023 (the last year of data available publicly). In contrast, and as a mirror image, Russia has decreased the US dollar share of its foreign exchange reserves from about 40% in 2014 to below 15% in 2021 (again, the last year of data we have access to). Interestingly, over the same period Russia has increased its renminbi share in foreign exchange reserves from 0% in 2014 to almost 25% in 2022. Ukraine has somewhat increased, then slightly decreased, its renminbi share in foreign exchange reserves, but at a magnitude about five times weaker and below 5%. This reshuffling of foreign exchange reserves seems not surprising, given the reallocation of trade and financial flows between each of these countries and their respective trading partners.
Concluding remarks
This column focuses on some key trends and insights from a recent analysis of the dominant reserve currency shares. What remains to be seen is the scale and speed of the future developments and reshuffling of these shares. Our best guess would be a gradual evolution of the currency composition of foreign exchange reserves across the world characterised by continued diversification and inertia. In other words, the US dollar could well remain the major currency for many years to come, even as its two main potential rivals, the euro and, possibly, the renminbi, gain more acceptance. The renminbi faces severe impediments to becoming an international reserve currency, including China’s underdeveloped capital markets, non-convertibility, and lack of transparency. Nevertheless, the renminbi may increase its share due to China’s growing importance in the global economy. The euro, on the other hand, certainly has great potential given the economic power the EU countries have together, while being democratic, free-market, and open economies. With the right economic and monetary policies, the euro could once again become a serious rival of the US dollar.
Source : VOXeu
