Trends of Currencies in Forex Reserves: Whither De-Dollarization?

Dollarization emerged as a feasible alternative when policymakers investigated different monetary policy and exchange rate systems at the end of 20th century. Due to its broad use, the USD is positioned as the default global reserve currency. A thorough literature study increased the body of information already known about the subject by synthesizing important concepts, spotting trends, and providing support for the paper’s conclusions. The trends in currency reserves suggest a gradual decline in the share of USD and new contenders make their mark, however small, affects the future of the global financial system. The percentage of USD in foreign exchange reserves decreased from 73% in 2001 to 59% in 2021. As of Q3, 2023 claims in USD were 54.59% of total foreign exchange reserves. De-dollarization emanates from the concerns over the dollar’s weaponization, the 2008 financial crisis, and the US Federal Reserve’s response to COVID-19 all contributed to this move away from the USD, which fostered global distrust. This transition was further expedited by China’s rise to prominence as a trading partner and investor. Even though it would be difficult for other currencies to overtake the USD as the dominant currency, recent US actions, such as economic sanctions on some countries, have alarmed other countries. The goal of the de-dollarization movement is to create alternatives to the status quo and reform the system. As the USD’s international standing declines, the multipolar structure of the global financial system may solidify; yet, the USD’s hegemonic status is not inherent, and cannot be taken as a given. The changing global financial scene points to a possible change, but it doesn’t seem realistic that other reserve currencies shall replace the USD very soon.