Last week, it was reported that the US dollar’s share of global foreign currency reserves has fallen to its lowest level this century. While it remains the world’s reserve currency par excellence, its formerly impregnable status appears in doubt. While the International Monetary Fund’s most recent inventory of global reserve holdings found that dollar reserves accounted for 57% of total holdings, that’s still sharply down. A decade ago, that figure stood at two-thirds.

The obvious candidates to one day replace the dollar — the euro and the Chinese renminbi — haven’t much changed their share of global reserve holdings, though. The euro’s share in the total reserves held by the world’s central banks has hovered around 20% for years. For its part, the Chinese currency remains an almost insignificant player, its share of global reserves having peaked at under 3% in 2021 and fallen since to below 2%.

Instead, in the last couple of years, global fund managers have begun to worry about the rising scale of American debt. They’re also concerned about the increasing willingness of US administrations of all stripes to effectively seize dollars in sanctions regimes, and in this instance about the volatility of the Trump White House. As a result, they have been reallocating ever more of their accumulated reserves to gold. Central banks now hold nearly as much gold in reserve as they did at the peak of the Bretton Woods era, when gold was the anchor for the international financial regime.

If this continues, would the world’s central banks eventually own enough gold to allow it to serve as the basis for a new currency regime? Perhaps, for example, one based not on the dollar but more akin to John Maynard Keynes’s proposal for a “Bancor” at the 1944 Bretton Woods Conference? It’s possible, but it may not be the most likely scenario at the moment. Instead, clues about the future of the world’s money supply can be found in some figures buried deep in the IMF’s database.

The share of reserves held in “other currencies”, which would include those of bigger developing countries such as Brazil or South Africa, has risen. From a low base of barely 2% a decade ago, the pace of increase has been dramatic, more than doubling since. This may reflect the rising importance of these economies, but equally significant is that they are at the forefront of experimentation in new forms of international payment settlement.

Two things could cause the dam to finally burst. One would be for China to both fully open its capital accounts to foreigners and allow the yuan to float freely, while simultaneously reducing its trade deficit. The other would be if Europe moved to common debt issuance — the Union borrowing on behalf of member states rather than each one selling its own bonds, thereby creating a bond market with the depth and liquidity to rival America’s.

Neither move appears imminent. Nonetheless, there is growing talk of the idea in Europe. Meanwhile, China is flirting with the possibility of raising the consumption share of the economy, which would reduce its trade surplus and lead to trading partners accumulating renminbi. Perhaps most significantly, it has been working with some of those partners to create a rival to the SWIFT payment system, the so-called Cross-Border Interbank Payment System, or CIPS. Among the countries most receptive to this new system have been emerging markets. That may explain the rise of their currencies in reserve holdings.

The old regime hasn’t fallen, but it’s starting to look shaky.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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