The US dollar’s share of global reserves increased slightly in the first quarter of the year, while the euro’s share declined, according to the International Monetary Fund (IMF). The rise in the US dollar’s share comes as the Federal Reserve continues with its aggressive rate-hike cycle aimed at curbing inflation. The greenback’s share of reserves rose to 59% in Q1, up from 58.6% in the previous quarter. Meanwhile, the euro’s share dipped to 19.8% in Q1, down from 20.4% in the previous three months.
Central banks hold global reserves as assets in various currencies, which they use in part to support their liabilities and respective currencies. Despite the recent fluctuations in currency valuations, the US dollar remains an attractive destination for those seeking yield or a safe investment amid concerns about global economic growth. The dollar index fell by around 0.9% in the first quarter after declining by as much as 7.7% in the final quarter of last year. However, the index recovered slightly in the second quarter, rising by 0.4%.
Conversely, the euro gained about 1.2% in Q1, following a surge of 9.3% in Q4 2022. The trend highlights the ongoing shift in the tussle for dominance between the US dollar and the euro. While the US Federal Reserve has raised borrowing costs more aggressively than in previous decades, it is nearing the end of its tightening cycle. Nevertheless, expectations among market participants suggest that while the US dollar will remain the dominant currency, its influence will gradually diminish.
A survey conducted by the Official Monetary and Financial Institutions Forum (OMFIF), a think tank, revealed that 75 central bank reserve managers expect only a slight decrease in the US dollar’s share of total reserves to 53% over the next decade, down from just under 60% currently. This projected shift aligns with the slow, long-term trend of de-dollarization.
In conclusion, the Q1 data from the IMF indicates a marginal uptick in the US dollar’s share of global reserves, while the euro’s share declined slightly. The ongoing rate-hike cycle by the Federal Reserve to combat inflation has contributed to the appeal of the US dollar as an investment. However, market expectations suggest that while the US dollar will retain its dominant position, its influence is likely to gradually diminish as part of the broader trend of de-dollarization in the coming years.
