According to some forecasts, the dollar will surrender 10% of its share of global foreign exchange reserves over the next 10 years. If that happens, 10 different currencies will benefit.
The latest Currency Composition of Official Foreign Exchange Reserve data from the International Monetary Fund show that the dollar’s share of global foreign exchange reserves fell to 57.4% in Q3 2024 (Figure 1). This is the smallest share since 1994 and represents a decline of almost nine percentage points during the last decade.
The key driver of this move has been a reaction to the increased weaponisation of the dollar. This has always been an aspect of its ‘exorbitant privilege’ but has grown in importance since the 11 September 2001 terror attacks and reached a peak in 2022 after the Russian invasion of Ukraine.
Figure 1. Dollar’s share of global reserves fell by 9pp over last decade
Dollar’s share of global reserve currencies, %
Source: IMF COFER
Weaponisation will also be a factor behind the next 10% decline in the dollar share. The US is in the enviable position of being able to use financial assets to achieve foreign policy, or sometimes military objectives, without deploying soldiers. Hence, national security goals can be achieved relatively cheaply.
However, as early as 2017, then US Treasury Secretary Jack Lew acknowledged that the use of this weapon will push some players to avoid the dollar in the future, thereby reducing the extent of dollar dominance.
Academics have been successful in forecasting the gradual decline in dollar dominance since the year 2000 but have been hopeless at forecasting which currencies would benefit. Many have been in search of a single winner, when the reality has been that a wide array of currencies have benefitted. This pattern will continue.
The top 10 countdown
It is the small currencies that have taken up most of the slack in the last decade. Some of these, such as the Japanese yen, UK sterling, Australian dollar, Canadian dollar and Swiss franc, are named in the IMF COFER report. All five of them will grow as the US dollar’s share declines.
Figure 2. Smaller currencies have profited from dollar’s smaller share
Major reserve currency shares except dollar and euro, %
Source: IMF COFER
The category that may continue to do best is described in the IMF data as ‘other’. These are non-traditional currencies that are currently not specifically measured in the data.
A non-traditional currency that will grow is the South Korean won. South Korea is the 12th largest nation in the world in terms of gross domestic product. Geopolitically, it is an important cog in the US association of like-minded nations. In May 2024 it was announced that South Korea was in talks to join the military security partnership between the US, UK and Australia known as AUKUS. Security agreements as well as trade flows (and the financial flows that mirror these) underpin the argument for the won.
A new name on the list for the next decade is the Indian rupee. India is the fifth biggest economy and most populous nation on earth. Size counts in this debate, as we saw a decade ago with the initial adoption and enthusiasm for China’s renminbi.
India is ‘non-aligned’, and keen to have cordial relations with a wide list of nations. It is in an unusual position. On one hand, it is part of the Quad security arrangement (with the US, Japan and Australia). On the other hand, India is a key member of the Brics group and since 2022 has had a close oil trading relationship with Russia. However, it also has land border tensions with fellow Brics member China.
Comparisons to the internationalisation of the renminbi are instructive. The Chinese currency began to be held as a reserve currency by central banks from 2010 onwards despite a lack of currency convertibility. While not a substitute for deep, liquid and open capital markets, large foreign exchange reserves help to dampen currency volatility and enhance the argument for investing in the new currency.
Large foreign exchange reserves may provide comfort to global central banks who are looking to diversify their currency exposure into the rupee. This is a bold forecast – but a small slice of this story will benefit the rupee.
The euro and renminbi will also win, albeit modestly
At the turn of the century the newly launched euro was expected to go toe-to-toe with the dollar. However, the euro’s weight in reserves today has barely changed since 1999. The lack of capital market union and failure to develop a single issuer bond market to rival the depth and liquidity of the US Treasury market are two reasons. Nevertheless, as the principal alternative to the dollar, the euro will take a small extra slice of the pie and remain in clear second place.
In 2016 the forecast winner was the Chinese renminbi. Following a promising start after the 2008 financial crisis and the decision by Beijing to promote the internationalisation of the currency, success has been modest. This is despite the fast-tracked inclusion in 2016 into the IMF currency basket known as the special drawing rights.
The renminbi is currently home to around 2% of global foreign exchange reserves. The share has declined since the Russian invasion of Ukraine. Eastern European central banks such as the Czech National Bank and the Central Bank of Lithuania have both liquidated their Chinese holdings. The latter explicitly cited Ukraine as a reason.
The renminbi story has also been hampered by capital market reforms that have fallen short of expectations, and most recently by Chinese bond yields that have fallen sharply. At current levels of yield new buyers of renminbi bonds might be discouraged.
However, geopolitical fracturing has two sides to it. For some nations China will be a friend rather than a foe, will command a larger share of the trade flows with these nations and the renminbi will have appeal for the managers of reserves. Despite headwinds, the renminbi will gain a modest foreign exchange reserves share over the next decade.
Finally, the Singapore dollar already has a small slice of the foreign exchange reserves pie, and can grow modestly. Large renminbi trade invoice flows through Singapore have led to rapid growth in the demand for Singapore dollar foreign exchange swaps. If continued, this will underpin the appetite for the Singapore dollar.
What chance of a new Brics currency backed by gold?
There has been speculation that a desire to avoid the dollar might encourage the launch of a gold-backed Brics currency, and that this might become a rival trade currency to the dollar and an eventual home for foreign exchange reserves.
This is unlikely. The Brics nations (Brazil, Russia, India, China, South Africa and, since 2024, Saudi Arabia, Egypt, United Arab Emirates, Ethiopia, Iran and Indonesia) are a heterogenous group, with differing objectives and – in the case of India and China – significant rivalries. This is not an obvious starting point for a shared currency project.
The issues involved in establishing any kind of Brics currency (gold-linked or otherwise) would be enormous. Further talk of adding nations to the Brics group would increase complexity and reduce the probability of a new currency arrangement. It will not be taking a share of the foreign exchange reserves pie in the next decade.
The conclusion must be that dollar dominance will continue to erode due to further weaponisation of the currency. But even if the weight of the greenback falls to 50%, primary dominance will be maintained because there will not be a single challenger from the pack. Instead, the next 10 years will see 10 currencies each take a small slice of the next 10% of dollar erosion.
Gary Smith is Client Portfolio Manager at Columbia Threadneedle.
Interested in this topic? Subscribe to OMFIF’s newsletter for more.