This is Why the U.S. Dollar Rules

Estimated reading time: 3 minutes

Dominant Dollar

The U.S. dollar is the world’s reserve currency. But the share of global foreign exchange currency reserves held in U.S. dollars is at a 25-year low. That might sound drastic — but it doesn’t mean the dollar’s dominance is in contention.

De-Dollarization

In the second quarter of 2023, the share of U.S. dollar reserves held by other nations’ central banks sat at nearly 60%, and that’s a 25-year low.

This could be a sign of “de-dollarization”, as governments around the world seek to reduce their dependence on the U.S. currency. Widespread de-dollarization occurred, it could weigh on the value of the dollar.

But that’s probably not what’s happening. Rather, there are some idiosyncrasies at work here. In July, Russia conducted only 30% of its exports in dollars and euros – compared to 85% at the start of 2022 – instead primarily using the Chinese yuan. Brazil and Argentina have also shown preference for China’s currency.

However, those countries were left with little choice but to decouple from the dollar. The U.S. shut off Russia’s access to most of its foreign reserves following the country’s invasion of Ukraine and Argentina has depleted much of its USD reserves in payments to the International Monetary Fund. Meanwhile, although Brazil’s President is actively encouraging de-dollarization, 80% of the country’s reserves remain in dollars.

Not to mention China itself, which has more than $3 trillion in dollar reserves but has cut its holdings of U.S. Treasury bonds by more than 20% since January 2022.

Currency Comfort

Even so, dollar investors can rest assured the greenback faces little currency risk for the time being. Even as governments around the world diversify their reserve holdings to include bigger shares of the euro and the yuan, the U.S. dollar remains a favorite for trade and the piggy bank.

Disclaimer
SoFi Securities (Hong Kong) Limited and its affiliates (SoFi HK) may post or share information and materials from time to time. They should not be regarded as an offer, solicitation, invitation, investment advice, recommendation to buy, sell or otherwise deal with any investment instrument or product in any jurisdictions. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
SoFi HK does not make any warranties about the completeness, reliability and accuracy of this information and will not be liable for any losses and/or damages in connection with the use of this information.
The information and materials may contain hyperlinks to other websites, we are not responsible for the content of any linked sites. The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi HK. These links are provided for informational purposes and should not be viewed as an endorsement. The risk involved in using such hyperlinks shall be borne by the visitor and subject to any Terms of Use applicable to such access and use.
Any product, logos, brands, and other trademarks or images featured are the property of their respective trademark holders. These trademark holders are not affiliated with SoFi HK or its Affiliates. These trademark holders do not sponsor or endorse SoFi HK or any of its articles.
Without prior written approval of SoFi HK, the information/materials shall not be amended, duplicated, photocopied, transmitted, circulated, distributed or published in any manner, or be used for commercial or public purposes.