US dollar reserve shift may be less widespread than headline figures suggest, NY Fed study finds
Dollar holdings accounted for 56% of official foreign-exchange reserves last year, down from 64% a decade earlier. The decline has increasingly been viewed as evidence that central banks are diversifying away from the greenback. But the New York Fed researchers argue that aggregate figures can obscure what is happening beneath the surface.
“There is little evidence of a widespread official diversification away from dollars,” Linda S. Goldberg and Sneha Parthasarathy wrote in a blog last week. “Aggregate statistics can create misleading impressions of broad trends when they actually reflect the concentrated actions of a few large players.”
Which countries are reducing US dollar holdings?
The research found that roughly equal numbers of countries increased and decreased their dollar holdings across two periods since 2015, challenging the idea that reserve managers globally have been moving in the same direction.
Instead, much of the decline was concentrated among a handful of countries. China and Russia accounted for most of the active reallocation away from the dollar between 2015 and 2019, according to the study. In the following period, from 2019 to 2023, China and Russia again featured prominently, alongside Mexico and Morocco.
That concentration matters because a relatively small number of large reserve managers can have a significant impact on global reserve statistics, making a broad-based shift appear larger than it actually is.What central banks are doing with dollar reserves
The New York Fed researchers said changes in dollar holdings in other countries were more closely tied to individual reserve-management requirements than a coordinated effort to reduce exposure to the US currency. Those considerations included access to dollar liquidity, exchange-rate management and protection against funding shocks.
“These drivers still retain their strength,” the researchers wrote. “The reserve change channel reflects a rotating group of countries responding to idiosyncratic reserve management needs rather than systematic dollar avoidance.”
The findings come as the dollar’s position in global reserves faces renewed scrutiny. International Monetary Fund data showed in January that the proportion of foreign central-bank reserves held in dollars had fallen to its lowest level since 1995. But the decline was attributed to the weaker value of the dollar rather than a reduction in the amount of dollar assets held by central banks, Bloomberg reported.
At the same time, a separate survey released in June indicated that most global central banks expected to reduce their exposure to the US currency over the longer term.
Taken together, the data suggest that the dollar’s dominance is facing pressure, but the New York Fed study cautions against treating every decline in its reserve share as evidence of a synchronized global move away from the currency.
(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)
