Emmanuel OchayiThe dollar’s dominance in global foreign exchange (FX) reserves took a slight dip in the second quarter of 2024, with its share dropping by 1.46 per cent compared to the previous quarter. According to the International Monetary Fund (IMF), this shift is largely due to countries exploring other currencies in a bid to hedge against economic instability.
Despite this drop, the dollar still accounts for 58 percent of the global FX reserves. The IMF reported that in Q2 2024, the dollar’s share dropped from $6.77 trillion to $6.675 trillion, while the euro’s share saw a slight increase, moving from $2.253 trillion to $2.265 trillion.
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Many countries are diversifying their reserves to spread risk and prepare for potential future economic uncertainties. “The global economy is facing a lot of challenges, and nations are simply taking precautions,” said Gita Gopinath, first deputy managing director at the IMF.
Aside from the euro, smaller currencies such as the Australian dollar and the Canadian dollar have seen an uptick in reserve holdings. In the second quarter of 2024, reserves held in Australian dollars rose from $248.4 billion to $256.45 billion, while Canadian dollar reserves increased from $295.64 billion to $306.85 billion.
“These nontraditional reserve currencies are attractive to reserve managers because they provide diversification and relatively attractive yields,” Gopinath explained. “The development of new digital financial technologies has also made it easier to trade and hold these currencies.”
The Dollar Remains Dominant, But for How Long?
Although the dollar’s share in global FX reserves has decreased, it still maintains a substantial lead over other currencies. However, the rise of smaller currencies and the fluctuation in global economic power raises questions about the dollar’s long-term dominance.
A recent Bloomberg report suggested that replacing the dollar could be much more challenging than when it overtook the British pound as the world’s leading reserve currency. “It took two world wars and a fiscal crisis for the greenback to replace the pound,” the report noted. “Fast-forward to today, and the global financial system is far more interconnected, with the dollar deeply embedded.”
The report suggested that a significant change in global currency leadership would require not only an economic shift but also a major transformation in how financial transactions are conducted globally.
China’s Renminbi Struggles to Keep Pace
The Chinese renminbi, which had made gains in global FX reserves in 2023, saw a 6 percent decline in its share in the second quarter of 2024. Despite China’s push for internationalizing the renminbi, its share of FX reserves has not risen as some had anticipated.
“The most recent data shows no further increase in the renminbi’s share of reserves. Some may suspect that the renminbi’s depreciation is hiding increases, but even when adjusting for exchange rate changes, the currency’s share has declined since 2022,” the IMF stated.
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China’s economy, while substantial, is still $4 trillion smaller than that of the United States, limiting the renminbi’s ability to challenge the dollar’s dominance on a global scale.
The Future of a Multicurrency Reserve System
Gopinath pointed out that a global system with multiple reserve currencies could offer several advantages, including more safe assets and broader FX reserve diversification. However, she warned that without strong coordination among reserve currency-issuing countries, such a system could pose risks to global stability.
“The stability of a multicurrency system would depend heavily on geopolitical cooperation,” she said. “Without that, we could see increased fragmentation in global trade and finance.”
While the dollar’s role remains critical, its slow decline in global FX reserves may signal the beginning of a shift. However, this shift is not expected to be swift or easy, as the global financial system continues to rely heavily on the greenback for trade, investment, and financial transactions.
For now, the dollar remains the anchor of global finance, but countries continue to explore alternatives to reduce their reliance on any one currency.
Emmanuel Ochayi is a journalist. He is a graduate of the University of Lagos, School of first choice and the nations pride. Emmanuel is keen on exploring writing angles in different areas, including Business, climate change, politics, Education, and others.
