Our underappreciated international reserve system

The composition of international reserves is in a constant state of flux. This column identifies some surprising recent trends, including the continued diversification away from US dollar reserves toward non-traditional currencies, rising central bank purchases of gold and soaring gold prices that have made gold the second-largest reserve asset, the repatriation of a significant fraction of gold reserves, and the stalling of Chinese renminbi internationalisation. While none of these developments is likely to have an immediate impact on the evolution of the international reserve system, any weakening of the US dollar’s safe-haven status would present a more serious challenge.

The international monetary system is never static; it is in a constant state of flux. That goes for the composition of international reserves, the bedrock on which the system rests. But as we show in our latest paper (Arslanalp et al. 2025), the direction of some recent changes is surprising. This goes for:

• continued diversification away from US dollar reserves towards nontraditional reserve currencies;
• central bank purchases of gold, together with the surge in gold prices, which have led to gold becoming the second most important asset in global reserve portfolios, overtaking the euro;
• repatriation of a significant fraction of those gold reserves, which has enhanced their security but diminished their financial utility; and
• the stalling of Chinese renminbi internationalisation.

The level and composition of international reserves have implications not just for the ability of central banks and governments to meet their foreign financial obligations, intervene in foreign exchange markets, and act as foreign currency lenders and liquidity providers to domestic banks and firms,  but also for global financial markets and asset prices generally. Diversification away from the dollar may have implications for exchange rates, both for the dollar and for other currencies on the receiving end of central bank investment flows.

A critical question here, of course, is diversification to which other currencies. Past practice suggests that we look to the currencies of other large economies – such as the euro (Chinn and Frankel 2007, 2008) and the Chinese renminbi (Subramanian 2011, Eichengreen et al. 2024) – as potential rivals or substitutes to the dollar. However, as we show, past practice may not be a good guide to future behaviour.

Diversification away from dollar reserves has also entailed diversification toward gold reserves, on the part of emerging economies, in particular. This too has potential implications for financial markets and asset valuations and may have played a role in the recent run-up of gold prices on world markets (Milesi-Ferretti 2026). Gold and nontraditional currencies may have become more attractive to central bank reserve managers insofar as central banks have accumulated reserves well in excess of the minimum – the so-called liquidity tranche – required for intervention and lending operations, since that excess – the so-called investment tranche – can comfortably be held in a less liquid and potentially more comfortable form. In addition, gold reserves have the advantage that they can be vaulted at home, insulating them from the threat of financial sanctions.

Although gold recently surpassed the euro as the second most important reserve asset worldwide, the US dollar remains first among equals (Bluestein 2025, Rogoff 2025, Eichengreen 2026). A central question looking forward is how quickly a dominant reserve currency can lose its leading status. Some analysts highlight complementarities between different functions of a dominant currency and the network externalities that tend to hold its dominance in place (see e.g. Gopinath and Stein 2021). Others question the sway of those network effects in a digital financial world where switching between currencies can be done at a lower cost than using traditional analogue technology (Eichengreen et al. 2018). They point to historical instances where there have in fact been sudden shifts from one leading reserve currency to another (see e.g. Eichengreen and Flandreau 2008).

We previously documented the falling share of the US dollar in foreign exchange reserves between 1999 and 2021 (Arslanalp et al. 2022). The latest data from the IMF’s Currency Composition of Official Foreign Exchange Reserves confirm this trend: the US dollar share of reserves fell below 57% in 2025 Q3, its lowest level in decades (Figure 1). This drop comes despite the relative stability of the US dollar in the second half of 2025 (as measured by its trade-weighted index).

Figure 1 US dollar share of global foreign exchange reserves and the US dollar index, 1999–2025 Q3 (per cent index Jan 2006 = 100)

Source: Arslanalp et al. (2022, updated).

This diversification has some surprising features. First, it has not been in favour of other ‘Big Four’ traditional reserve currencies – the euro, Japanese yen, and the pound sterling. Instead, the Australian and Canadian dollars, Singapore dollar, South Korean won, and Scandinavian currencies have gained ground, probably reflecting the reduced cost of trading these currencies and their favourable return characteristics. Since 2020, we identify seven new economies that joined the list of ‘active diversifiers’ – economies holding more than 5% of their reserves in nontraditional currencies: Israel, Netherlands, Seychelles, Slovak Republic, Slovenia, Uzbekistan, and West Bank and Gaza.

Another surprising feature is that reserve diversification has not strongly favoured the Chinese renminbi, often touted as a potential rival to the US dollar. Since 2021, when it peaked at almost 3%, there has been a gradual decrease in the share of the Chinese renminbi to below 2% (Figure 2). This comes despite policies aiming to encourage the use of the renminbi, such as the extension of renminbi central bank swap lines and renminbi investments through the Belt and Road programme. We find evidence that these policies do have a positive effect on renminbi holdings but may be overshadowed by other factors like higher returns on alternative assets and geopolitical tensions.

Figure 2 Renminbi share of global foreign exchange reserves and the renminbi exchange rate, 2017–25 Q3 (per cent; dollar per renminbi)

Sources: IMF Currency Composition of Official Foreign Exchange Reserves; IMF International Financial Statistics.

Our empirical analysis of the dollar share of reserves points to a role for economic and financial ties with the US; if these ties weaken or loosen, we would expect the dollar share to decline further. We also find a role for geopolitical alliances with the US, as proxied by a bilateral defence pact, which encourage dollar reserve holding. If questions continue to be raised about the strength and stability of US alliances, these too may be reflected in declining dollar shares. For the renminbi, perceived geopolitical risks and lower returns on the renminbi appear to be driving the declining trend.

The resurgence of gold reserves was also discussed in previous work (Arslanalp et al. 2023), where we found that a group of emerging-market central banks had actively been buying gold since 2008. Among the largest buyers of gold, countries facing heightened macroeconomic or geopolitical risk featured prominently. This pattern has continued since 2021, but more recently, the increase in gold prices has also raised the gold share for both advanced and emerging economies (Figure 3). In fact, since 2021, the rise in gold prices accounts for nearly all of the increase in the gold share for advanced economies and about 80% for emerging markets and developing economies. Over the same period, five more countries (China, India, Jordan, Poland, Thailand) have joined the list of active diversifiers into gold.

Figure 3 Composition of global reserves (FX reserves+gold), 1999–2025 (per cent)

Sources: IMF Currency Composition of Official Foreign Exchange Reserves; IMF International Financial Statistics.

We also document a growing trend of repatriation of gold from vaults in the Federal Reserve Bank of New York and the Bank of England since 2013. Survey evidence suggests that shielding reserve assets from financial sanctions is an important motivation for this, but several European central banks have also repatriated gold despite not being targets of sanctions (Figure 4). This trend is all the more striking since gold reserves become less liquid once they are moved out of these traditional vaults, where they can easily be used in transactions with other central banks.

Figure 4 Repatriation of gold reserves by central banks, 2000–25 (per cent of gold reserves at end-2025)

Source: Arslanalp et al. (2025).

These changes to the international reserve system have been gradual. Efforts to engineer a more decisive move away from the US dollar – such as discussions between BRICS countries on a new single currency or local currency settlement – have failed to gain any momentum. In the other direction, the 2025 US GENIUS Act provides a regulatory framework for US dollar-linked stablecoins, potentially encouraging their adoption. However, the advantages of stablecoins over traditional payment methods are unclear. We conclude that none of these developments is likely to have an immediate impact on the evolution of the international reserve system.

A more serious challenge to the current system would come from any weakening of the US dollar’s safe-haven status. In recent stress episodes like President Trump’s ‘Liberation Day’ tariff announcement, the dollar showed signs of falling when it would normally be expected to provide a hedge against market volatility. But so far, this behaviour has been temporary, and the dollar has since regained its safe-haven characteristics.

The only forecast that can be made with confidence is that the international reserve system will continue to evolve.

Source : VOXeu