The dominant status of the US dollar as the reserve currency of choice could be in trouble as its share of global currencies kept in reserve begins to fall. Data from the International Monetary Fund (IMF) reveal that the dollar’s share of reserves declined from 66 percent in Q3 2014 to just over 60 percent in Q3 2020. This means that the share of the dollar has declined at a rate of around 1 percentage point each year.
Faltering Reserve Currencies
In the meantime, as one study shows, this number reflects the lowest dominant currency share in almost 8 years. In addition, the study also explains that ‘the fall in the dollar’s share (actually) started 20 years ago when the euro took the position of the predecessor currencies that used to be in the foreign exchange reserve basket.’ According to statistics, the year 1991 is the worst for the dollar. That year, the dollar’s reported share of reserves fell to 46%.
In the meantime, the euro, which was the “last effort of the single currency to dethrone the dollar” as the number one reserve currency, has been trapped between 19.5% and 20.6% for the last six years. Similarly, China’s renminbi yuan (RMB) currency, which became the official reserve currency in October 2016, does not seem to see any progress. Since the RMB’s inclusion in the IMF’s Special Drawing Rights (SDR) Currency Basket, the Asian country’s currency has won just 2.13 per cent of reserves. China is the second-largest economy in the world.
The Yen Ascendancy
In the other hand, only the Japanese Yen seems to have gained as the proportion of the Asian country’s reserve currency increased from 3.5% in 2015 to 6% by the end of Q3 2020. This feat has rendered “the Yen the third-largest reserve currency.”
For now, the same study explains that as the dollar’s position as the world’s highest reserve currency begins to deteriorate, it will also “take a decade for the dollar’s share to fall to 50 per cent, with other currencies recovering.” In either case, this depreciation would only begin to have an impact on the US when the dollar’s share fell far below 50 per cent.
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