Reserve De-Dollarization in Progress? | Econbrowser

More articles on dollar dominance, e.g. in Foreign Policy, Wells Fargo, vs. BitcoinNews. But most of the discussion centers on dollar use in terms medium of exchange etc. (SWIFT use, invoicing). Here, some recent trends for the reserve dimension.

Here are some pictures of key reserve currencies held by the BRICS.

Figure 1: Share of foreign exchange holdings in USD, by central bank. Source: Ito-McCauley database,.

Next, EUR holdings shares; note the change in scale.

Figure 2: Share of foreign exchange holdings in EUR, by central bank. Source: Ito-McCauley database,.

The holdings of USD exhibit a sharp drop only for Russia.  What about the RMB? We have quite limited information here.

Figure 3: Share of foreign exchange holdings in RMB, by central bank. Source: Ito-McCauley database,.

Will implementation of sanctions result in reduced dollar holdings? Unfortunately, we don’t have data for the period after the expanded invasion of the Ukraine, but we do have estimates encompassing up to 2021.

Source: Chinn, Frankel and Ito (JIMF, 2024).

Note the estimated coefficient is not statistically significant. It’s also nonlinear, so a bit difficult to interpret. Table A1.1 in the paper presents estimates from a linear shares regression for USD holdings (only), so that the coefficient estimate is easier to interpret.

Source: Chinn, Frankel and Ito (JIMF, 2024).

The point estimate is very small (and not statistically significant). Taken literally, with an autoregressive coefficient of 0.88, the long run impact is 0.05, so that if the US has imposed financial sanctions on a country, on average that country’s central bank will hold 5 percentage points less US dollars. But, the 95% confidence interval encompasses a 6 percentage point increase in dollar shares.

Hence, arguments that use of financial sanctions will erode dollar dominance are not verified empirically, thus far (maybe with data to 2023, we would find something different).