The IMF’s paper begins by explaining that the appeal of the US dollar to the global economy has been on the decline ever since the collapse of the bretton woods agreement, these happened in 1971 when then president richard nixon announced that the US government would be quote temporarily suspending the ability for individuals and institutions to convert dollars to gold, some analysts argue that the bretton woods agreement had collapsed many years before when other countries started suspect that the US government didn’t have the gold it needed to back the dollars in circulation.
In any case the authors of the paper explain that the dollar remained the world’s reserve currency despite the collapse of bretton woods because there were basically no alternatives, however over the last couple of decades currencies like the euro and the chinese renminbi have emerged as potential contenders mainly because of how widespread these currencies have become.
The authors specify that the paper centers around the composition of international foreign exchange reserves held by central banks IE how much currency they’re holding that’s not native to their respective countries, as you can see that the numbers of US dollars held by central banks has fallen from 71% in 1999 to 59% in 2021 and the authors believe this has nothing to do with countries trying to move away from the dollar quote rather it reflects active portfolio diversification by central bank reserve managers. They believe this because central banks haven’t been accumulating the currencies you’d expect them to namely the euro japanese yen and british pound, the currencies that were once seen as runners-up for the role of world reserve currency and the currencies that are part of the so-called big four, instead central banks have been accumulating other so-called non-traditional currencies and the authors estimate that only about a quarter of this alternative allocation has ended up in the chinese renminbi.
The remaining three quarters of foreign exchange reserves consist of other currencies, insterestingly the authors cite technologies such as the automated market making mechanisms you find in define and the currency swap protocols of fintech platforms like wise as the reason why this is happening ?