Dollar's Reserve Share Decline Largely Driven by Small Number of Countries

The decline in the dollar's share of foreign-exchange reserves may be overstated, according to a recent study from the Federal Reserve Bank of New York. While it's true that dollar holdings have decreased over the past decade, researchers found that this shift is largely due to the actions of a small number of reserve managers.

Between 2015 and 2023, countries like China, Russia, Mexico, and Morocco accounted for much of the decline in dollar holdings. However, these moves were not necessarily driven by a desire to diversify away from the US currency. Instead, they were often motivated by country-specific needs such as access to dollar liquidity or exchange-rate management.

The researchers also noted that the reserve change channel reflects a rotating group of countries responding to idiosyncratic reserve management needs rather than systematic dollar avoidance. This means that while some countries may be reducing their exposure to the US currency, others are increasing theirs.