US Dollar Loses Grip on Global Reserves

According to Eswar Prasad, former head of the International Monetary Fund's China division, geopolitical factors and US financial sanctions are causing central banks and official investors to diversify away from dollar assets.

Prasad noted that the rise in US interest rates is contributing to this trend. To illustrate this point, a graph was created showing the rate at which Fed debt is rising relative to the official sector's holdings of US debt.

The data shows that while foreign official sector holdings may be understated (estimated to be around $300-$400 billion by Brad Setser), it is clear that reserves in Treasurys are not increasing proportionally with overall public debt.

Central bank data from the IMF's COFER also indicates a decline in the US dollar share of foreign exchange reserves, which was down since end-2024Q4. Adjusting for exchange rate valuation changes, the uptick in initial figures is smaller.