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Drivers of Dollar Share in Foreign Exchange Reserves

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Abstract

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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    1. Bacchetta, Philippe & van Wincoop, Eric, 2005. "A theory of the currency denomination of international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 295-319, December.
    2. Ethan Ilzetzki & Carmen M Reinhart & Kenneth S Rogoff, 2019. "Exchange Arrangements Entering the Twenty-First Century: Which Anchor will Hold?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(2), pages 599-646.
    3. Eichengreen, Barry & Mathieson, Donald J., "undated". "The Currency Composition of Foreign Exchange Reserves Retrospect and Prospect," WIDER Working Papers 295509, United Nations University, World Institute for Development Economic Research (UNU-WIDER).
    4. Chiţu, Livia & Eichengreen, Barry & Mehl, Arnaud, 2014. "When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets," Journal of Development Economics, Elsevier, vol. 111(C), pages 225-245.
    5. Aizenman, Joshua & Cheung, Yin-Wong & Qian, XingWang, 2020. "The currency composition of international reserves, demand for international reserves, and global safe assets," Journal of International Money and Finance, Elsevier, vol. 102(C).
    6. 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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    More about this item

    Keywords

    foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves;
    All these keywords.

    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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