Global foreign exchange reserves are decreasing from the US dollar

Foreign exchange reserves held by central banks and governments around the world are moving away from the US dollar. As of the end of 2024, the US dollar accounted for 57.8% of total foreign exchange reserves, the lowest level calculated by the end of the year since statistics began in 1995. In order to diversify international assets, more and more countries have begun to re-examine their high dependence on the US dollar and increase their holdings of assets such as gold. Against the backdrop of returning to the “interest-rate era”, the share of the Japanese yen, whose investment attractiveness has increased, has risen for the third consecutive year.

Foreign exchange reserves are funds reserved by governments to repay foreign debts or settle import payments in emergencies. In order to curb sharp exchange rate fluctuations, they can also be used as funds for exchange rate intervention. Assets such as bonds, deposits and gold issued by foreign governments are the objects of foreign exchange reserves.

The currency composition of official foreign exchange reserves (COFER) released by the International Monetary Fund (IMF) shows that global foreign exchange reserves will be US$12.3641 trillion by the end of 2024. The US dollar accounted for 57.8%, down 0.6 percentage points from the end of the previous year. Although the dollar peaked at more than 70% around 2000, the proportion has continued to decline in recent years.

In order to diversify their assets internationally, governments and central banks around the world are accelerating the pace of “de-dollarization”. As an alternative asset to the dollar, gold is receiving more and more attention. Gold is not attached to any specific country, so it is also called “stateless currency”.

According to data from the World Gold Council (WGC), as of December 2024, Russia held about 2,300 tons of gold in its foreign exchange reserves, accounting for 32% of the country’s foreign exchange reserves. Compared with 10 years ago, Russia’s gold reserves have increased by nearly 2 times.

The United States has repeatedly imposed financial sanctions on Russia, China and other countries, excluding them from the US dollar settlement system. In 2022, as one of the economic sanctions against Russia for launching the Ukrainian war, the United States and other Western countries excluded several major Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system.

Professor Kiyotaka Sato of Yokohama National University in Japan pointed out that “countries that are dissatisfied with the United States and other Western countries may be building a fund settlement system other than the US dollar.”

During the Trump administration, the market’s vigilance against the acceleration of the “de-dollarization” trend has further heated up. Although the current mainstream view is that Trump is unlikely to give up the dollar’s position as the “axis currency”, there are also views such as Keiichi Iguchi, a senior strategist at Japan’s Resona Holdings, who believe that “the market’s concerns about the dollar’s position as the global axis currency are still strong.”

Behind the “de-dollarization”, the revaluation trend of the yen is strengthening. As of the end of 2024, the yen will account for 5.82% of the world’s foreign exchange reserves, up 0.1 percentage points from the end of last year. The upward trend has continued for 3 years. It fell below 3% at the end of 2009, but has been gradually increasing its presence in recent years.

With the Bank of Japan’s interest rate hike, the Japanese economy has returned to the “world with interest rates.” Some analysts believe that the rising yields of Japanese government bonds and other currencies have driven the trend of holding yen. “The trend of avoiding the original low-interest yen has eased,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

About half of the world’s foreign exchange reserves are in Asia. As of the end of 2024, China, as the largest holder, will hold about $3.45 trillion, accounting for about a quarter of the world’s foreign exchange reserves. When observing the trend of foreign exchange reserves, China’s actions have become the focus.

The chief market economist of Mizuho Bank in Japan said, “There are more and more views that the current system of a strong dollar will be transformed into a system where multiple currencies such as the euro and the yen are options. In this process, the yen, which is geographically close to Asia, may be favored.”

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