The U.S. dollar's status as the world's reserve currency continues to erode as gold and "non-traditional" reserve currencies gain ground.

According to data recently released by the IMF, the dollar's share of global reserve currencies declined further last year. Total holdings of dollar-denominated securities by central banks (excluding the Federal Reserve) fell by $59 billion in 2024.

At the end of last year, dollars accounted for 57.8% of world reserves. This is the lowest level since 1994, representing a decline of 7.3% over the last decade. In 2002, dollars accounted for approximately 72% of total reserves.

This is not the first wave of de-dollarization. The dollar's share of reserves plummeted during the inflationary years of the 1970s, but recovered during the 1990s as price inflation moderated and U.S. budget deficits narrowed thanks to the post-Cold War "peace dividend".

Today, the dollar faces a triple whammy: rigid price inflation, out-of-control federal spending that generates massive budget deficits, and global wariness of the West's use of the dollar as a weapon.

De-dollarization has accelerated since the United States and other Western countries imposed strong sanctions on Russia following its invasion of Ukraine.

According to a report by the Atlantic Council, " in recent years, and especially since Russia's invasion of Ukraine and the subsequent escalation of the use of financial sanctions by the Group of Seven (G7), some countries have been signaling their intention to diversify their investments and move away from the dollar " .

What is replacing the dollar? 

If central banks reject dollars, what do they hold? Increasingly, they are reinforcing their reserves with gold.

Central bank gold demand exceeded 1,000 tonnes for the third consecutive year in 2024. To put this in perspective, central bank gold reserves increased by an average of only 473 tonnes per year between 2010 and 2021.

According to IMF data, between 2006 and 2023, central banks around the world increased their official holdings by about 200 million troy ounces (6221 tons). This does not take into account the large amount of gold that the People's Bank of China (and probably other countries) buys unofficially.

In dollar terms, the central bank's official gold holdings amount to US$3.65 billion.

Since 2005, Russia and China alone have added a combined total of 3,626 tons of gold to their official reserves. (Again, China holds far more gold than this amount, which is not included in official declarations).

Other currencies are also gaining participation as reserve instruments to the detriment of the dollar.

Euros account for about 20 % of world reserves. Their share has remained stable over the years, from a low of 19.1 % in 2016 to a high of 21.3 % in 2020.

The Chinese yuan has also lost ground as a reserve currency since 2022. According to WolfStreet, " central banks have not been attracted to RMB-denominated assets due to China's capital controls, RMB convertibility issues and other complexities ".

However, the following currencies are gaining ground in the world of foreign reserves (Courtesy of WolfStreet ).

Japanese yen, 5.8% (YEN, purple).

2. Pound sterling, 4.7% (GBP, light blue).

3. "All other currencies", 4.6% (red).

4. Canadian dollar, 2.8% (dotted green).

5. Chinese renminbi, 2.2% (yellow).

6. Australian dollar, 2.1% (black dot).

7. Swiss franc, 0.2% (black).

Why is it important?

Simply put, the United States needs the world to need dollars.

The United States depends on this global demand for dollars, backed by its reserve status, to prop up its huge government. The only reason Uncle Sam can borrow, spend and run up huge budget deficits is its role as the world's reserve currency. This creates an intrinsic global demand for dollars and dollar-denominated assets. This absorbs the Fed's money creation and helps maintain the dollar's strength despite its inflationary policies.

WolfStreet summarized the risk facing the United States as the dollar's status continues to erode.

The U.S. dollar's position as the dominant global reserve currency has helped the U.S. finance its two deficits, which has made possible its twin deficits: the huge annual fiscal deficit and the massive annual trade deficit. This reserve currency position is because other central banks (not the Federal Reserve) have bought trillions of dollars in dollar-denominated assets, such as Treasury bonds, other government securities, corporate bonds, and even stocks. The dollar's position as the dominant reserve currency has been crucial to the United States, and as its dominance slowly diminishes, the risks are slowly accumulating as well. 

While the threat is not immediate, a slowly growing pile eventually becomes a giant pile.

The world does not have to completely abandon the dollar to generate negative impacts. Even a slight drop in demand for dollars will impact the U.S. economy. Even a modest de-dollarization of the world economy would cause a glut of dollars. The value of the U.S. currency would depreciate further. This translates into higher price inflation at home. In the worst-case scenario, the dollar could collapse completely, causing hyperinflation.

Mike Maharrey, Money Metals