The last three years were complicated for the dominant reserve currency. At first there was the Fed’s $5-trillion money-printing orgy and interest-rate repression. Then there was raging inflation, which the Fed brushed off as “transitory.” Through this period, the dollar fell against other currencies. But then the Fed got religion and began to tighten: since March 2022, it has hiked rates by 425 basis points, accompanied over the past six months by $414 billion in QT so far. As a result, the dollar bounced off and shot higher against other currencies, particularly the euro and the yen – the #2 and #3 reserve currencies.
At the end of Q3, the share of US-dollar-denominated foreign exchange reserves rose to 59.8%, the third quarter in a row of increases, and the highest since Q3 2020, according to the IMF’s new COFER data on reserve currencies. Since the end of 2021, the share of the dollar rose by nearly 1 percentage point.
But this increase came off a 26-year low at the end of 2021. Note that this does not include the dollar-denominated assets on the Fed’s balance sheet, but only dollar-denominated assets held by foreign central banks and foreign official institutions:
The dollar as reserve currency means that foreign central banks and other foreign official institutions hold US-dollar-denominated assets, such as Treasury securities, US corporate bonds, US mortgage-backed securities, and the like.
These foreign central banks and official institutions also hold assets denominated in other currencies. And all those assets combined make up the total global foreign exchange reserves, which amounted to $11.6 trillion in all currencies when expressed in USD, according to the IMF’s COFER data; 59.8% were dollar-denominated assets.
The remaining 40.2% were assets denominated in other currencies, primarily the euro, and a bunch of also-rans, whose value were then translated into USD.
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