The (Declining) Status of the US Dollar as Global Reserve Currency: Central Banks Diversify into other Currencies & Gold

There was an extra-special spectacle in Q1 among the Swiss franc, Australian dollar, British pound, and Japanese yen.

By Wolf Richter for WOLF STREET.

The dollar’s status as dominant foreign exchange-reserve currency has been diminishing for years as central banks have been diversifying to other currencies and over the past three years massively into gold. The decline of the dollar has been slow and halting, a couple of steps forward, one step back, sometimes bigger steps, other times smaller steps, and it remains by far the dominant global reserve currency. But the long-term trend is clear – and this has significant long-term consequences for the US.

The share of USD-denominated foreign exchange reserves declined to 57.7% of total foreign exchange reserves in Q1, according to IMF’s data today. In Q3 2024, the dollar’s share had dropped to a 30-year low.

The hump starting in 2014 was a result of the Euro Debt Crisis when central banks briefly diversified away from euro securities back into USD securities.

USD-denominated foreign exchange reserves include US Treasury securities, US agency securities, MBS, corporate bonds, and other USD-denominated assets held by central banks other than the Fed.

The dollar’s share had plunged to 46% in 1991. At the time, inflation had exploded in the US, and eventually the world lost confidence in the Fed’s ability or willingness to get this inflation under control, and they sought refuge for their foreign exchange reserves somewhere else.

But after inflation had been brought under control, central banks started switching back to dollar-assets, until the arrival of the euro – the first plausible alternative to the dollar until that concept was nixed by the Euro Debt Crisis.

This six-decade chart shows the dollar’s share at the end of each year except 2025 = Q1.

But they didn’t dump US Treasury securities, they just added more other stuff.

In Q1 this year, their holdings of Treasury securities rose to $3.96 trillion, the highest since Q1 2022, but below the high in 2021, and essentially unchanged from 12 years ago, according to the Treasury Department’s data on foreign holders.

These are holdings of Treasury securities, as reported by the Treasury Department, while the USD-denominated foreign exchange reserves reported by the IMF include all USD-denominated securities, from Treasuries to corporate bonds. [Here is our discussion on who overall held US Treasury securities: Who Held or Bought the Huge US Government Debt].

Total holdings of USD-denominated assets as foreign exchange reserves – so US Treasuries, agency securities, MBS, corporate bonds, etc. – rose in Q1 to $6.72 trillion but remain below the high in 2021 of $7.1 trillion and are about level with Q1 2019.

The other reserve currencies.

The euro’s share, #2, ticked up to 20.1%. It has been around 20% for years (blue in the chart below).

The other currencies are the colorful tangle at the bottom of the chart. More on those in a moment. Combined, they have been gaining share over the years, at the expense of the dollar, while the euro’s share has remained roughly stable since 2015.

The colorful tangle at the bottom under the microscope.

Q1 provided an extra-special spectacle there in that tangle at the bottom of the above chart that we now look at under the microscope:

  • Spiked: Swiss francs (CHF, gray), pound sterling (GBP, light blue), “other currencies” (red)
  • Plunged: Australian dollars (AUD, black dotted), Japanese yen (YEN, purple), Canadian dollars (CAD, green dotted).

This massive shift among these smaller foreign exchange reserves may have had something to do with the huge global shifts of gold in Q1, including massive imports of gold into the US largely from Switzerland. These unprecedented massive imports of gold into the US that blew up the Atlanta Fed’s GDPNow may have also entailed or paralleled large-scale shifts in foreign-currency assets held by central banks.

The category “other currencies” (red in the chart above) is a basket of “nontraditional reserve currencies,” as the IMF calls them, whose combined share has been surging since 2020. That’s really where the action has been, spread across many small reserve currencies.

China is the second largest economy in the world, but the renminbi plays only a small role as a reserve currency. And it has lost ground against the USD and other currencies since 2022, as central banks have not been enamored with RMB-denominated assets for a variety of reasons, including capital controls, convertibility issues, and other issues.

Far behind the USD and the EUR, the largest currencies by share (chart above):

  1. British pound, 5.2% (GBP, blue).
  2. Japanese yen, 5.1% (YEN, purple).
  3. “All other currencies” combined, 4.9% (red).
  4. Canadian dollar, 2.6% (green dotted).
  5. Australian dollar, 1.4% (black dotted), down from 2.1% in Q4.
  6. Chinese renminbi, 2.1% (red).
  7. Swiss franc, 0.8% (gray), up from 0.2% in Q4.

The diversification into gold.

Gold bullion is not a “foreign exchange reserve” asset of central banks, and is not included in the data above. But both, gold and “foreign exchange reserves,” are “reserve assets” that central banks hold.

In 2011, central banks started rebuilding their gold holdings, after having spent decades unloading them. Then in 2022, 2023, and 2024, they suddenly bought gold at a record pace, over 1,000 tonnes of gold per year, double the average of the prior 10 years. And the price of gold spiked from this dramatic buying pressure.

These purchases of over 1,000 tonnes of gold per year for three years in a row pushed up total gold holdings by central banks to 36,000 tonnes, close to the all-time high of 38,000 tonnes in 1965 during the Bretton Woods era, according to an ECB report, citing data from the World Gold Council.

The chart from the ECB shows purchases in tonnes per year (blue columns, left scale) and the price of gold through 2024 (yellow line, right scale, $ per troy ounce):

The ECB’s report adds:

“With the price of gold reaching new highs, the share of gold in global foreign reserves at market prices, at 20%, surpassed the share of the euro (16%).

“Survey data suggest that two-thirds of central banks invested in gold for purposes of diversification, while two-fifths did so as protection against geopolitical risk.

“The share of gold in total official foreign reserves – comprising foreign exchange and gold holdings – increased to 20% at the end of 2024, surpassing that of euro, on the back of historically high gold prices and purchases.

“Surveys suggest that hedging motivated by economic and geopolitical factors played a role in these historically large purchases of gold, notably in emerging and developing economies.

“Countries that are geopolitically distant from the West have been active diversifiers into gold.”

Why is the dollar’s status as global reserve currency important?

Central banks other than the Fed have purchased $6.7 trillion in dollar-denominated financial assets, largely US Treasury securities. This money flow into the US has helped the US fund its twin deficits – the huge trade deficit and the even huger budget deficit – and thereby has enabled the US to incur those two deficits.

The dollar status as the dominant reserve currency has been crucial for the US, it has enabled the US to live beyond its means. As that dominance declines slowly — two steps forward, one step back — all kinds of risks pile up ever so slowly, including the sustainability of the government deficits and the debt.

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  23 comments for “The (Declining) Status of the US Dollar as Global Reserve Currency: Central Banks Diversify into other Currencies & Gold

  1. Alex J. Pollock says:

    Wolf, The Fed, unlike many central banks, owns zero gold. It has thus misssed the big gold rally. Do you know if the Fed can legally own gold now? It couldn’t after the Gold Reserve Act of 1934, but that act’s provisions were mostly repealed in 1974. I have tried without success to get the Fed to answer the question whether it could buy and hold gold now, if it wanted to. Maybe you know the answer? All the best, Alex

    • Wolf Richter says:

      1. The Gold Reserve Act of 1934 required the Fed to transfer ownership of its gold to the Department of the Treasury. In return, the Treasury issued gold certificates to the Fed for the amount of gold transferred at what was back then the statutory price for gold held by the Treasury. Fed’s gold certificates are still priced at $42.22 per troy ounce (in total $11.04 billion book value on the Fed’s balance sheet, or about $850 billion market value if the Fed could cash them in, which it can’t).

      2. The Fed is in charge of monetary policy (interest rates) and the stability of the banking system, and gold is irrelevant to the Fed for those purposes. I know that gold bugs would love for the Fed to print trillions of USD to buy gold with them, so you have the combo of money printing and gold buying by the Fed, and gold bugs have serial climaxes over that illusion because it would blow the price of gold out the wazoo, and the gold bugs would get rich, but it’s just nonsense for the Fed to do that, and everyone knows it. I don’t understand why this keeps coming up.

      3. If you want the Fed to print money to buy gold, you need to talk to your congressman and tell them to change the law.

      • DM says:

        Isn’t that what the Lummis Bitcoin bill does? Revalue the gold certificates from $42.22 to current market value.

        I think she intends to bring this a vote in August.

        • Alex J. Pollock says:

          Under this bill, the gain on the price of gold would all go to the Treasury, not to the Fed.

      • Alex J. Pollock says:

        You’re right that the Fed’s gold certificates cannot ever be worth more than $11 billion–they convey no interest in gold’s market price, as was carefully designed in 1934. I am not asking whether the Fed SHOULD own gold, but whether under current law it is able to. Thought you might know, I don’t. The Fed was required to own gold in 1913. Forbidden in 1934. Most Depression era gold restraints were removed in 1974. What is the legal situation now? Would it take a new law for the Fed again to own gold? Or not? By the way, really nice essay on the dollar and international reserves.

      • Ol'B says:

        Interesting. I’ve always believed, for many meny decades now, that the Federal Reserve Bank of NY had a big pile of gold in their vault, right under Liberty Street. Of course JP Morgan Chase is on the other side of the road and they share the vault..

        Maybe that’s just from the movies. John McClain and all.

        • Wolf Richter says:

          That gold belongs to the US Treasury and others. The New York Fed just acts as the custodian of it.

        • TSonder305 says:

          I’ve known people who have worked at the Fed who have gotten to go down there. You have to wear special shoes, because each bar weighs 28 pounds and would break your toes if one was dropped on you without protection.

        • AlphaChicken says:

          “Of course JP Morgan Chase is on the other side of the road and they share the vault..”

          From the St. Louis Fed site: “”So is the Fed private or public? The answer is both. While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations … Member banks also elect six of the nine members of each Reserve Bank’s board of directors.”

  2. Bongo says:

    You explain things so well.

  3. Gazillion says:

    20 percent of the S&P 500 value is 3 stocks…the other 497 make up the 80 percent…the fiscal insanity continues until the day of reckoning comes…the corporately controlled media cheers it all on the past 30 years…if they can sanction your holdings anytime in dollar assets, physical gold in your vaults is good and selfish
    .

  4. Typecheck says:

    China has recently issued some long term bonds to the international market. It will continue to do so over time to increase supply of RMB denominated assets. Maybe this will allow RMB to be used more as a reserve currency.

  5. Chris B says:

    Isn’t it curious how foreign buyers are loading up on real estate in places like Athens, Portugal, Amsterdam, Southern Spain, Vancouver, Los Angeles, Seattle, etc. at the same time their central banks are reducing the percentage of their USD and Euro assets? At the same time they’re buying gold?

    It’s exactly what would happen if they were to predict inflation in the high-debt Western democracies. And some of those central banks are in the Western democracies!

    Do you see any correlation between debt/GDP and the most popular recent reserve currencies?

  6. AK says:

    Gold (priced in USD) appreciated by 24% since start of 2025, so 20% figure that Europen Central bank report quotes must be now 25%.

  7. Amon-Ra says:

    Wouldn’t it be one step forward, two steps back? Two steps forward and one step back, you’re still making progress.

    • Wolf Richter says:

      On the path to no longer being the dominant reserve currency — that’s the direction, and it’s two steps forward and one step back in that direction, see chart number 1.

      You and I may not like that, but that’s the direction.

  8. SoCalBeachDude says:

    The primary industry that is affected very adversely by the manic and beyond senseless speculation in gold is the jewelry industry which is very substantial in the US, China, India, Thailand, and other places. Gold is now prohibitively priced to use in most jewelry where it was long used and it has just become another massively inflated commodity which enormous room to fall in price as real demand for it dries up.

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