What does the chart show?
 
This chart shows the currency composition of the foreign exchange reserves of global central banks. The holding of reserves by central banks is an important tool for ensuring the stability of a country’s currency, which provides predictability to businesses, investors, or financial institutions that operate internationally. Countries with less stable financial institutions hold reserves in more reliable and globally accepted currencies, such as the US Dollar (USD) or the Euro, to back up the value of their own currencies. In 2000 almost 90% of global reserves were held in either Euros or USD. The decline of this figure to 78% at the end of 2022 has been driven almost entirely by a falling proportion of reserves being held in USD, that has fallen from 71% to 58%. Reserves held in Chinese Yuan have risen to 2.69%.

Why is this important?

There are few better ways of showing the USA’s economic and financial might than the pre-eminence of the USD in both global trade and as the preferred foreign exchange reserve currency. However, with the proportion of foreign reserves being held in USD having gradually declined since the year 2000, questions are being asked whether the dominance of the Dollar will last. Rising geopolitical tensions have led to some countries such as Brazil and Russia raising security concerns over US weaponisation of the Dollar. Last year the US was able to freeze $130 billion of Russian reserves as retaliation for their invasion of Ukraine. One issue in reducing reliance on the Dollar is finding a suitable alternative. The price of gold surged higher late last year due to large central bank purchases with the precious metal being identified as a possible Dollar replacement for backing up a currency. There are also suggestions that the Chinese Yuan could act as a reserve currency for countries that are unable or unwilling to deal in Dollars. In recent years, China has emerged as a rival to the US’s financial and political dominance which has led to rising tensions between the two superpowers. However, with just 2.7% of global reserves being held in Yuan, the Dollar remains a clear favourite. To increase the global influence of the Yuan, China has also gone after another, arguably more important pillar of Dollar dominance: global trade. In 2018 China opened an oil exchange where contracts for the world’s most traded commodity were settled in Yuan rather than Dollars. However, China’s more stringent capital controls and less developed financial system have meant that traders have remained wary and so the proportion of global trades being settled on the Shanghai exchange has risen to just 5%. The Dollar’s position as the global reserve currency of choice appears to still be strong and the lack of a realistic alternative means that it may well stay that way for some time.