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Drivers of Dollar Share in Foreign Exchange Reserves

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The share of U.S. dollar assets in the official foreign exchange reserve portfolios of central banks, at times, is taken as an indicator of dollar status. We show that the observed decline in aggregate U.S. dollar shares is not from a systematic decline in preferences for dollar assets. Instead, it is explained by a small group of countries, both due to monetary policies executed vis-à-vis euros and due to a small group of large foreign exchange reserve balance countries. Regression analysis shows that relative interest rates of reserve currencies and nontraditional currencies can tilt portfolio composition, particularly in relation to the scale of investment tranches within overall central bank portfolios. Geopolitical distance from the United States and financial sanctions are associated with lower U.S. dollar shares mainly if the primary foreign currency liquidity needs of the central bank are already satisfied.

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  • Linda S. Goldberg & Oliver Zain Hannaoui, 2024. "Drivers of Dollar Share in Foreign Exchange Reserves," Staff Reports 1087, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:97928
    DOI: 10.59576/sr.1087
    Note: Revised August 2024.
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    7. Mr. Serkan Arslanalp & Mr. Barry J. Eichengreen & Chima Simpson-Bell, 2022. "The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies," IMF Working Papers 2022/058, International Monetary Fund.
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    Cited by:

    1. Laser, Falk Hendrik & Mihailov, Alexander & Weidner, Jan, 2024. "Currency compositions of international reserves - recent developments," BOFIT Policy Briefs 6/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    2. Aizenman, Joshua & Park, Donghyun & Qureshi, Irfan A. & Saadaoui, Jamel & Salah Uddin, Gazi, 2024. "The performance of emerging markets during the Fed’s easing and tightening cycles: A cross-country resilience analysis," Journal of International Money and Finance, Elsevier, vol. 148(C).

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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