The dollar’s share in world currency reserves could decline until 2050 to 40-45% from around 60% at present, under scenarios discussed by the OMFIF advisory council. The gradual fall, alongside an increase in the importance of the euro and the renminbi, is seen as a natural consequence of the gradual reduction in America’s relative importance in the world economy.
Factors that could speed up the fall include more aggressive action by emerging market economies to promote the use of non-dollar currencies as well as persistent US budget and current account deficits, according to participants at the advisory council meeting on 15 October.
Kamala Harris and Donald Trump, the contestants in the US presidential election on 5 November, show little readiness to take action on this issue. Concerns about the use of US power over the dollar system in sanctions against Russia and allies in the war with Ukraine could worsen, as well as worries about ballooning American deficits, depending on the next White House incumbent. These anxieties are also helping spur the latest spurt in the gold price.
Since the second world war, the dollar has been the backbone of the global financial system, serving as the primary currency for international trade, central bank reserves and global debt issuance. According to International Monetary Fund data, the dollar’s share of global currency reserves was 58.9% in the second quarter, unchanged from the first three months of 2024. It has fallen by roughly 10 percentage points over the past 20 years. The euro’s share was 19.9% in the second quarter, according to the IMF.
‘No bad thing’ if dollar’s share falls
How long dollar dominance will last is a question OMFIF is asking during the annual meetings of the IMF and World Bank in Washington this week. Participants at the OMFIF gathering last week underlined that the dollar’s world role was deeply rooted in US and international financial infrastructure given its depth and liquidity, but would change over time. It was ‘no bad thing’ if the share fell from 60% to 40-45% over a 20-25-year period. Complacency over the dollar’s role from US policy-makers and financial market participants, as well as some countries’ intensifying efforts to weaken or abandon the dollar standard, could influence a further decline.
According to OMFIF’s 2024 Global Public Investor report, central bank reserve managers surveyed anticipate the share of the dollar in global reserves to fall to around 55% in 10 years.
Allocations to renminbi to increase – but only over longer term
China’s growing economic clout and efforts to internationalise the renminbi have prompted speculation about a potential shift in the global currency order. Yet, significant hurdles remain for the renminbi, which looks an unlikely candidate to replace the dollar even over a longer period. As many as 12% of reserve managers surveyed in OMFIF’s 2024 GPI were looking to lower renminbi holdings in the next 12-24 months. Geopolitics and faltering market transparency were seen as key short-term deterrents to investing in Chinese financial assets.
Taking a longer view, allocations to the renminbi are set to increase, as reserve managers anticipate its share of global reserves doubling to 5.6% over the next 10 years, from 2.3% now. The euro, the next most widely-held reserve currency, faces its own challenges from European political fragmentation and stagnating growth. The most likely currencies to profit from the dollar’s gradual decline may be those of other industrialised countries, including sterling and the Australian and Canadian dollars.
For emerging markets, particularly in Africa, navigating the dollar-renminbi dynamic presents a complex challenge. As one meeting participant observed, ‘Africa can’t be on one side or the other, but [it] needs to be better at predicting because African countries have smaller reserves’. Geopolitical tensions and the impending change in the US presidency have heightened concerns about dollar ‘weaponisation’. With more than 20 African countries either facing or already in debt distress, and China a major creditor in many cases, these nations must pay special attention to navigating Sino-American tensions.
Additionally, the growing popularity of digital assets may also influence currency allocations. A meeting participant noted that there has been an increased appreciation for blockchain beyond its uses for cryptocurrencies. More innovation and creativity can be expected in the payments area in coming years, with central bank digital currencies and multi-CBDC platforms potentially altering the landscape of international finance.
The incoming US administration’s stance on key issues – including international trade relations, Federal Reserve independence and fiscal management – will be crucial in determining the dollar’s trajectory. Domestic policy choices may prove as influential as external challenges in shaping the dollar’s long-term status.
David Marsh is Chairman and Arunima Sharan is Senior Economist, Economic and Monetary Policy Institute at OMFIF.
