by Wolf Richter, Wolf Street:

Long, slow erosion of the US dollar’s dominance. China’s renminbi keeps losing ground, many other currencies gain, as does gold.

The US dollar is still by far the most dominant global reserve currency, among many reserve currencies, but its share has been eroding for years, as central banks have been diversifying their assets to other reserve currencies, and also to gold. But the process is slow and uneven.

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The share of USD-denominated foreign exchange reserves ticked up to 58.9% of total exchange reserves in Q1, from 58.4% in Q4, which had been the lowest share since 1994, according to the IMF’s COFER data released on Friday for Q1 2023.

Central banks held total foreign exchange reserves in all currencies of $12.3 trillion in Q1. This included $6.77 trillion in US-dollar denominated assets, such as US Treasury securities, US agency securities, US government-backed MBS, US corporate bonds, even US stocks.

Excluded are any central bank’s holdings of assets denominated in its own currency, such as the Fed’s holdings of Treasury securities and MBS, and the ECB’s holdings of euro-denominated assets.

In dollar terms, holdings of USD-denominated assets at foreign central banks rose to $6.77 trillion in Q1.

It’s not that central banks are “dumping” their dollar-assets – in dollar amounts, their dollar-holdings haven’t changed all that much. It’s that they take on assets denominated in many alternative currencies, and as overall foreign exchange reserves grow, the dollar’s share of the total shrinks.

The USD’s share of global reserve currencies has seen a lot of turmoil between 1978 through 1991, when the share collapsed from 85% to 46%, after inflation exploded in the US in the late 1970s, and the world lost confidence in the Fed’s ability or willingness to get this inflation under control.

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