The US dollar’s share of currency reserves plunged in the final quarter of 2020 to its lowest in 25 years, according to International Monetary Fund (IMF) data. Analysts say the drop was due in part to valuation adjustments.
The greenback’s share of global FX reserves slipped to 59% in the fourth quarter, from 60.5% in the third, declining for three straight quarters. In 1995, the US currency’s share amounted to 58%.
Still, the dollar has the largest share of currency reserves held by global central banks, according to the IMF. Analysts said that reserves held in US dollars rose to an all-time peak of $7 trillion in the fourth quarter, compared with $6.939 trillion in the third. Reserves held in euros grew 7% on a quarterly basis to $2.52 trillion.
The euro share rose to 21.2% in the fourth quarter, compared with 20.5% in the third. Its share in Q4 was the highest since 2014. At its peak in 2009, the euro’s share of global reserves stood at 28%.
The Chinese yuan’s share increased to 2.25% during the period, gaining for four consecutive quarters, with renminbi reserves rising 9% to $267 billion. The IMF started tracking the Chinese currency’s share in 2017.
“This is a slow burn theme, but we are of the view that we’re eventually headed into a ‘multiple reserve currency’ framework over time,” Bipan Rai, a strategist at CIBC, told Bloomberg.
According to Marc Chandler, chief market strategist at Bannockburn Global, the drop in the dollar’s share of global reserves is temporary and was driven by its slide against most currencies in the fourth quarter. “The 59% is a statistical noise generated by a combination of valuation and material changes” in demand for the euro in the fourth quarter, he said, adding, “The dollar’s recovery in Q1 ‘21 will reverse the valuation adjustment and will see the dollar share of reserves increase.”
Global reserves are assets of central banks held in different currencies and used primarily to support their liabilities. Central banks sometimes use reserves to help support their respective currencies.
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