Over the next 10 years the US dollar will likely surrender another 10% share of global foreign exchange reserves – but there will be no single beneficiary, with 10 different currencies all growing their allocations
Latest data from the IMF Currency Composition of Official Foreign Exchange Reserves
(COFER) shows that the US dollar share of global foreign exchange reserves fell to 57.4% in Q3 2024. This is the smallest share since 1994 and represents a decline of almost 9% over the past decade (Figure 1).
Figure 1: US dollar share of global currency reserves on a downward trend (%)
Source: IMF COFER, January 2025. Figures on a quarterly basis
Weaponisation will also be a driver of the next 10% decline in the dollar share. As early as 2017 the then US Treasury secretary Jack Lew acknowledged that the use of this weapon would push some players to avoid the dollar in the future, thereby reducing the extent of its dominance.
Academics have been successful in forecasting the gradual decline in US dollar dominance since 2000 but have been hopeless at forecasting which currencies would benefit. Many were in search of a single winner, when the reality has seen a wide array of currencies benefitting. This is a pattern that we believe will continue.
In fact, we think that over the next 10 years another 10% will be eroded from the dollar weight within IMF COFER statistics, and if that happens 10 different currencies will benefit.
The top 10 countdown
Over the past decade, it is the smaller currencies that have taken up most of the slack. Some of these such as the Japanese yen, UK sterling, the Australian dollar, the Canadian dollar and the Swiss franc are named in the IMF COFER report. All of them will continue to grow as the US dollar share declines (Figure 2).
Figure 2: the rise of ‘Other’ – currencies picking up the reserves slack
Source: IMF COFER, January 2025. Major reserve currency shares ex-US dollar and euro
A non-traditional currency we think will win is the South Korean won. It is named in the
COFER report but is not measured individually, sitting in the “Other” category within the IMF data. It is this category that has made biggest gains in the past three years. Perhaps the IMF should publish more granular data?
A new name we think could appear on the list for the next decade is the Indian rupee. India is the world’s fifth biggest economy and its most populous nation. 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”3 and keen to have cordial relations with a wide list of nations. It is also in a relatively unusual position: on the one hand, India is part of the Quad security arrangement with the US, Japan and Australia. On the other, it is also a key member of the BRICS (Brazil, Russia, India, China, South Africa) group and since 2022 has 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 FX reserves do help dampen currency volatility. And in the case of the rupee they may also provide comfort to global central banks looking to diversify their currency exposure. A bold forecast, but a small slice of this story will surely 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 US dollar. Since them, however, the euro’s weight in FX reserves has barely changed. 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 for this. Nevertheless, we think the euro, as the principal alternative to the US dollar, will take a small extra slice of the pie and remain in clear second place.
In 2016 the forecast winner was the Chinese renminbi (or yuan). After a promising start following the global financial crisis and the decision by Beijing to promote the internationalisation of the currency, success has been modest. This despite the fast-tracked inclusion in 2016 into the IMF currency known as the SDR4.
The renminbi is currently home to around 2% of global FX reserves. We note that 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 citing 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, it will command a larger share of the trade flows with these nations, and the renminbi will appeal to the managers of those reserves. China is the largest trading nation for more than 120 countries and trading flows are potential payment flows for the renminbi. So, despite headwinds the yuan should continue to gain a modest FX reserves share over the next decade.
However, geopolitical fracturing has two sides to it. For some nations China will be a friend rather than a foe, it will command a larger share of the trade flows with these nations, and the renminbi will appeal to the managers of those reserves. China is the largest trading nation for more than 120 countries and trading flows are potential payment flows for the renminbi. So, despite headwinds the yuan should continue to gain a modest FX reserves share over the next decade.
Finally, the Singapore dollar should benefit. It already has a small slice of the FX reserves pie and could grow modestly from here. The currency should continue to ride on the coattails of the renminbi – large renminbi trade invoice flows through Singapore have led to rapid growth in the demand for Singapore dollar FX swaps. This will likely underpin future appetite.
What chance of a BRICS currency backed by gold?
There has been speculation that a desire to avoid the US dollar might encourage the launch of a gold-backed BRICS currency, and that this might become a trade currency rival to the US dollar and an eventual home for FX reserves.
We believe this is unlikely. The BRICS nations are a heterogenous group with differing
objectives – and in the case of India and China, significant rivalries. So, 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. Recent talk of adding nations to the BRICS group would only add to the complexity and in fact reduce the probability of a new currency arrangement. This is not an idea we believe will be taking a share of the FX reserves pie in the next decade.
What it means for investors
The extent of US dollar dominance will continue to erode due to the continued weaponisation of the currency. But even if the weight of the greenback falls to 50%, we believe its 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 take a small slice of the next 10% wave of dollar erosion.
We will also increasingly see the internationalisation of up-and-coming currencies as bond market reforms around the world improve and encourage access for foreign investors. This in turn should trigger an evolution of the leading global bond indexes. A convenient way for investors to position for these opportunities will be to invest in broad-based products benchmarked against emerging market and global aggregate indexes. If you would like more information or want to discuss some of the themes in this piece in more detail please don’t hesitate to get in touch with your usual Columbia Threadneedle Investments contact.
