Dollar Diversification: NY Fed Study Finds Widespread Shifts May Not Be As Wide As Thought

The US dollar's share of global foreign-exchange reserves has been declining, but a recent study by the Federal Reserve Bank of New York suggests this shift may not be as widespread as previously thought.

The decline in the dollar's share from 64% a decade ago to 56% last year led many to believe central banks were diversifying away from the US currency. However, researchers Linda S. Goldberg and Sneha Parthasarathy argue that aggregate figures can obscure what's happening beneath the surface.

The study found that roughly equal numbers of countries increased and decreased their dollar holdings across two periods since 2015. Instead of a broad-based shift away from the dollar, the decline was concentrated among a handful of countries, primarily China and Russia between 2015 and 2019, and again in 2023.

The researchers noted that changes in dollar holdings in other countries were tied to individual reserve-management requirements rather than a coordinated effort to reduce exposure to the US currency. These drivers included access to dollar liquidity, exchange-rate management, and protection against funding shocks.