11.05.202113:00 Forex Analysis & Reviews: US dollar's role as the world's reserve currency is declining

The International Monetary Fund (IMF) said that the US dollar is starting to lose its role as the world's reserve currency, since the central banks around the world are lowering the share of dollar reserves.

At the end of 2020, central banks' share of dollar reserves declined to 59%. This is the lowest figure in the last 25 years.

The IMF data showed that since the introduction of the euro in 1999, the share of US dollar assets held in central bank reserves has declined by 12%, while the share of the euro was about 20%. At the same time, the Australian dollar, Canadian dollar and Chinese yuan rose to 9% during the fourth quarter. If this trend continues, withdrawing from the US dollar could affect the broader currency and bond markets.

This actually reflects the declining role of the US dollar in the global economy in relation to competition from other currencies used by central banks for international transactions. So, when large changes occur in central bank reserves, they can affect bond markets and the currency.

The main reasons why the share of the US dollar in world reserves is declining are short-term exchange rates and the decision of central banks to neglect this currency.

The fact that the value of the US dollar has not changed globally, and its share in world reserves has deteriorated, suggests that central banks are actually gradually trying to abandon the US dollar. Now, emerging markets will play a crucial role as we move away from it.

Perhaps, the share of the US dollar in global reserves will continue to plunge because central banks in emerging markets will seek to further diversify the currency structure of their reserves. Several countries have already announced their intention to do so.

In addition, if inflation continues to increase, the probability of the USD weakening in the future will also increase. Previously, when the Fed raised rates, capital inflows were enough to keep the dollar strong. But now that the Fed continues to hold it at zero and conducts quantitative easing, the capital account will not be able to provide enough inflows to support the dollar.

Moreover, the US dollar is under threat because the United States uses it as a foreign policy tool that punishes certain strategic rivals, such as Iran, North Korea, and China. This triggered a global withdrawal from the US dollar, while moving towards gold.

If China moves from the dollar to the yuan, the value of its currency will rise. They just don't want to do it yet. They have a lot of export goods and the expensive yuan is not profitable. If they switch to the euro and the yen, they will increase the value of the euro and the yen, thus creating trade friction with Japan and Europe.

Now, which path will they choose? The most logical one is the one that will not be captured by the US. Accordingly, it is gold. This is the diversification of central banks from treasury securities to gold, which has already begun. That's why gold rose by 60% from 2018 to the middle of 2020. In the end, this can definitely weaken the US dollar and gradually raise the gold's price.