U.S. dollar FX reserves refer specifically to the portion of a country’s foreign exchange reserves held in U.S. dollars. These reserves are mostly in the form of:
- U.S. Treasury securities
- U.S. agency bonds
- U.S. bank deposits
The U.S. dollar dominates global FX reserves. As of 2024, over 58% of global reserves were still held in dollars (down from over 70% two decades ago), according to the IMF COFER database.
Several factors support the U.S. dollar’s role as the world’s primary reserve currency:
- Trust and Liquidity: U.S. Treasury markets are deep, liquid, and widely trusted.
- Network Effects: Global trade, commodities (like oil), and debt are often priced in dollars.
- Stability and Rule of Law: The U.S. political and legal systems are viewed as relatively stable and reliable.
- Dollar-Denominated Assets: Dollar reserves offer relatively safe returns and act as a hedge during crises.
Why Countries Hold U.S. Dollar FX Reserves
- To Maintain Exchange Rate Stability
Central banks intervene in FX markets to stabilize their currency—buying/selling USD to manage volatility. - To Back Sovereign Debt or Currency Pegs
For countries with fixed or managed exchange rate regimes, holding USD ensures they can defend the peg. - To Ensure Foreign Debt Payments
Many countries’ external debts are in USD. Holding reserves ensures timely repayment. - To Boost Confidence Among Investors
Adequate reserves signal economic strength, improving sovereign creditworthiness and attracting FDI. - To Manage Imports and Global Trade
Since many global transactions (especially commodities) are settled in USD, reserves ensure smooth trade financing.
