Report

Drivers of Dollar Share in Foreign Exchange Reserves

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 dollar status. We show that the observed decline in aggregate U.S. dollar shares is not from a systematic decline in preferences for dollar assets. Instead, it is explained by a small group of countries, both due to monetary policies executed vis-à-vis euros and due to a small group of large foreign exchange reserve balance countries. Regression analysis shows that relative interest rates of reserve currencies and nontraditional currencies can tilt portfolio composition, particularly in relation to the scale of investment tranches within overall central bank portfolios. Geopolitical distance from the United States and financial sanctions are associated with lower U.S. dollar shares mainly if the primary foreign currency liquidity needs of the central bank are already satisfied.

Keywords: foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves;

JEL Classification: F3; F31; F33;

https://doi.org/10.59576/sr.1087

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2024-03-01

Number: 1087

Note: Revised August 2024.