The US Dollar's Changing Global Role and Its Volatility - an Illustrative Analysis Using an Analogy from the Stock Market

Over the past 25 years, the share of USD-denominated assets in the foreign exchange reserves of the world's central banks has gradually declined. On the one hand, this tendency can be partly attributed to exogenous factors, such as the US dollar's declining role in foreign trade and certain international financial transactions. On the other hand, it may also reflect changing perceptions of USD hegemony. This essay first maps the risks to the primacy of the dollar, relying on the research findings of Rogoff. Then, an empirical analysis is performed to address the following question: how is the volatility of the USD exchange rate expected to change if the risks were to materialise. The approach used exploits the analogy between a stock swap deal of two Hungarian listed companies and the changing composition of foreign reserves. Based on the results, it cannot be ruled out that further rearrangements in reserve composition may cause substantial fluctuations in the exchange rate, especially in the case where central bank decisions are driven by shifts in perceptions.