Central banks are turning away from the dollar and into nontraditional currencies, including the renminbi, to diversify their holdings. The global share of the dollar on reserve currencies has been in steady decline over the past 20 years.
Reserve managers have moved out of dollars in two directions, one quarter headed into the renminbi and three quarters into currencies of smaller countries that have traditionally played a limited role as reserve assets.
Though China’s currency is gaining some ground, there’s also a notable shift into currencies including the Australian dollar, Canadian dollar, Singapore dollar, Korean won and Swedish Krona.
A characterization of the evolution of the international reserve system in the last 20 years is particularly as a gradual movement away from the dollar, a recent modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies. These observations provide hints of how the international system may evolve going forward.
This shift is broad 46 active diversifiers have been identified that have shifted their portfolios in this direction, such that they now hold at least 5 percent of their reserves in nontraditional currencies.
This comes as global sanctions against Russia in response to its invasion of Ukraine have triggered fresh debate about the dollar’s dominance of global finance and trade and whether the conflict will accelerate the use of rival currencies, such as the renminbi.
The latest data shows the renminbi remains ranked as fifth most widely used currency for global transactions, the same as last year. Still, China’s currency has struggled to gain market share in global transactions as the government enforces strict controls on the flow of money into and out of the country.
