Drivers of Dollar Share in Foreign Exchange Reserves

Linda Goldberg and Oliver Zain Hannaoui

No 1087, Staff Reports from Federal Reserve Bank of New York

Abstract: The share of U.S. dollar assets in the official foreign exchange reserve portfolios of central banks, at times, is taken as an indicator of the dollar’s global status. We provide a decomposition that shows two distinct channels contributing to the changes in the dollar share of reserves aggregated across countries: shifts in preferences for dollar assets and changes in reserve balances driven by countries whose portfolio allocations differ from the aggregate. We document how the concentrated nature of foreign exchange reserve holdings allows countries that contribute a large share of aggregated reserves to exert substantial influence on aggregate dollar shares over time, potentially dominating the narrative. In recent periods, the key contributors to changes in aggregate preference shifts for dollar assets are changes in bilateral country trade with the United States and dollar debt share, with geopolitics additionally working through the investment tranches of central bank portfolios. Diversification away from dollar assets is more prevalent conditional on official reserves of countries being large enough to satisfy country liquidity needs.

Keywords: foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves (search for similar items in EconPapers)
JEL-codes: F3 F31 F33 (search for similar items in EconPapers)
Pages: 48
Date: 2024-03-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon, nep-opm and nep-pay
Note: Revised February 2026.
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Citations: View citations in EconPapers (5)

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DOI: 10.59576/sr.1087

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