Central Banks Retreat From U.S. Dollar

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Among those paring U.S. dollar holdings in recent months: central banks.

The dollar’s share of global reserves has decreased to its lowest level since 1995, according to International Monetary Fund figures on central banks’ foreign-exchange holdings released last week. The currency now stands at 59% of global reserves as of December 2020—a 1.5 percentage point decline over the quarter.

The WSJ Dollar Index slipped 0.25% Tuesday, its fourth decline in five sessions. It has fallen around 8% from a year ago, after the pandemic fueled a rush into ultrasafe assets and the dollar surged against the euro and British pound.

Although the dollar has edged higher year-to-date, some on Wall Street expect factors including trade deficits and China’s expansion to weigh on the currency this year. Central banks are the largest players in the foreign-exchange market, overseeing nearly $12 trillion in reserves, so investors watch their holdings closely.

“Several structural trends skew the medium-term dollar outlook in a negative direction, including the widening U.S. trade deficit, China’s financial opening and the European Union’s efforts to create a common bond market for the region,” said Zach Pandl, head of foreign-exchange research at Goldman Sachs, which forecasts a slightly weaker dollar over the next 12 months.

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