De-dollarization may be the wrong way to think about the dollar.
The debate around the dollar’s global role tends to focus on its share of global FX reserves.
But that may increasingly be the wrong place to look.
In a recent analysis for the Council on Foreign Relations, Alex Etra, Senior Macro Strategist and Head of Flow of Funds at Vanda Research, and CFR’s Brad Setser argue that the more important shift is not necessarily away from the dollar. Instead, dollar assets are increasingly being held outside traditional central bank reserves, across state banks, pension funds and other sovereign and quasi-sovereign institutions.
They call it “de-reservification, not de-dollarization.”
The distinction matters. Formal reserve holdings have changed relatively little over the past decade, while substantial pools of foreign assets have accumulated elsewhere in the public sector. In China, Japan and Korea, for example, state-linked institutions now hold significant foreign portfolios that aren't fully captured by traditional measures of FX reserves.
And much of that capital remains heavily tilted towards the dollar.
What may be changing, then, is not simply the dollar’s dominance, but the nature of the demand supporting it: away from traditional reserve accumulation and towards institutions investing for returns across US equities, bonds and other assets.
That raises a more interesting question for markets than the headline de-dollarization debate: where is sovereign capital actually moving, and what does it choose to own?
Read the full analysis, “De-reservification, Not De-dollarization,” by Alex Etra of Vanda Research and Brad Setser of the Council on Foreign Relations.
