This is Why the US Dollar Rules

Dominant Dollar

The U.S. dollar is the world’s reserve currency. But the share of global foreign exchange currency reserves held in U.S. dollars is at a 25-year low. That might sound drastic — but it doesn’t mean the dollar’s dominance is in contention.

De-Dollarization

In the second quarter of 2023, the share of U.S. dollar reserves held by other nations’ central banks sat at nearly 60%, and that’s a 25-year low.

This could be a sign of “de-dollarization”, as governments around the world seek to reduce their dependence on the U.S. currency. Widespread de-dollarization occurred, it could weigh on the value of the dollar.

But that’s probably not what’s happening. Rather, there are some idiosyncrasies at work here. In July, Russia conducted only 30% of its exports in dollars and euros — compared to 85% at the start of 2022 — instead primarily using the Chinese yuan. Brazil and Argentina have also shown preference for China’s currency.

However, those countries were left with little choice but to decouple from the dollar. The U.S. shut off Russia’s access to most of its foreign reserves following the country’s invasion of Ukraine and Argentina has depleted much of its USD reserves in payments to the International Monetary Fund. Meanwhile, although Brazil’s President is actively encouraging de-dollarization, 80% of the country’s reserves remain in dollars.

Not to mention China itself, which has more than $3 trillion in dollar reserves but has cut its holdings of U.S. Treasury bonds by more than 20% since January 2022.

Currency Comfort

Even so, dollar investors can rest assured the greenback faces little currency risk for the time being. Even as governments around the world diversify their reserve holdings to include bigger shares of the euro and the yuan, the U.S. dollar remains a favorite for trade and the piggy bank.

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