The Dollar's Dominance Is Shrinking
The Dollar's Dominance Is Shrinking — and it's the krona and the won that are replacing it in reserves, the IMF says
Zahra Tayeb Thu, June 2, 2022
The dollar's dominance is eroding in the face of non-traditional reserve currencies, IMF economists said.
Currencies including the krona and won account for three-quarters of the shift from the greenback.
It comes as central bank reserve managers seek to diversify their portfolios.
The dollar has reigned supreme as the world's global reserve for decades — but that story has been changing, according to economists at the International Monetary Fund.
In fact, the dollar's share of global foreign exchange reserves dipped below 59% in the final quarter of last year, continuing a downtrend that has been going on for two decades, an IMF blog post on Wednesday said.
"The dollar has not become more dominant. It has not even maintained the dominance of prior years," economists Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell wrote.
The shift away from the dollar is being driven by central banks' interest in non-traditional reserves, including the Swedish krona, the South Korean won, and the Australian and Canadian dollars. The currencies of smaller economies that traditionally haven't been in reserve holdings account for three-quarters of the shift away from dollars, IMF economists said.
At the same time, other traditional reserve currencies that have played a large international role — including the euro, yen, and the pound — haven't seen increases at the dollar's expense.
Three factors, they noted, have contributed to the erosion of the dollar's standing: the growing liquidity of markets in non-traditional currencies, the rise of new financial technologies that make it cheaper to trade currencies of small economies, and central banks' hunt for higher-yielding bonds as yields on the 10-year US Treasury bond declined.
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