The dollar stays strong despite decline in reserves

Diana Estefanía Rubio

The dollar stays strong despite decline in reserves

The US dollar was the most common currency in foreign exchange reserves in 2020, comprising more than three times the amount of the euro in global reserves that year.

It is not just because the US is the world’s largest economy but also because oil — a key commodity needed by all economies big and small — is priced in the greenback.

Most commodities are also priced and traded in US dollars. This total peaked in 2015, partly due to the strength of the dollar during the Eurozone crisis. The share of the US dollar has lost out to the Japanese yen and euro, as well as other currencies.

After World War II, the US dollar itself became the international currency in the Bretton Woods Agreement and is thus the most common currency for international payments.

Low risk currency

The United States Treasury is also seen by most as risk-free, giving the country a low-risk premium. For this reason, countries hold US dollars in reserve because the currency holds value relatively well in the long run.

However, calls to move away from relying on the US dollar for trade are growing. As the world’s second-largest economy, China is one of the most active players in this direction, given its dominant position in global trade currently.

In 2022, China was the largest trading partner to 61 countries, imports and exports combined, while the US was the largest trading partner to 30 countries.

Since 2016, the International Monetary Fund has included the Chinese renminbi (yuan) as part of the Special Drawing Rights (SDR) basket.

This decision recognised the influence of the renminbi as a reserve currency, particularly in several Asian countries. China also holds significant foreign exchange reserves itself, funded by its large positive trade balance.

font change