Twitter is flooded with death of the dollar reserve currency stories. Let’s discuss the real story. 
Conventional Wisdom
De-reservification, Not De-dollarization
Brad Setser, senior fellow at Council on Foreign Relations, explains it’s De-reservification, Not De-dollarization
The world isn’t moving away from the dollar. It is shifting its dollars from traditional reserves to state banks, pension funds, and other quasi-sovereign investors.
The IMF’s data on the currency composition of foreign exchange (FX) reserves is scrutinized carefully for any signs that the world is shifting way from the dollar.
Yet it doesn’t really matter that much if the dollar’s share of reserves has shifted from 56.5 percent to 57 percent. The ink-to-impact ratio of the quarterly reporting on the latest COFER data is all off.
Neither the stock of global reserves nor the stock of dollar reserves has changed much in the last ten years.
The action is elsewhere.
China’s state banks (per the Bank of International Settlements) have almost as many foreign assets as the central bank (PBOC).
Japan’s Government Pension Investment Fund (GPIF) has almost as many foreign assets ($986 billion) as the government has FX reserves ($1.1 trillion at the end of August). Japan’s FX reserves are on the books of the Ministry of Finance and the GPIF is overseen by the Ministry of Health, Welfare and Labor—so these are almost all assets of the Government of Japan or the broader public sector, not its central bank.
Korea’s National Pension Service has more foreign assets than the Bank of Korea has FX reserves.
Consider China.
No serious analyst now disputes that China’s state banks—including the policy banks (the China Development Bank, China Exim)—hold several trillion in foreign assets.
China reports $3.3 trillion in gross foreign assets to the BIS (the net position, counting foreign bank claims on the entire Chinese economy not just the banks, is $2.5 trillion). That maps to the BOP data, which shows almost $4 trillion in gross outflows through the banking system (technically, the sum of gross outflows in “other” plus the $500 billion in foreign currency bonds held by the state commercial banks)
China External Assets
The broad contours of this story are confirmed by the balance sheet data reported by state commercial banks in their 2025 annual reports, which showed that the top five banks held a combined $2.5 trillion in foreign currency assets (mostly held abroad).
The Chinese haven’t disclosed the foreign assets of the two policy banks (with at this stage the complicity of the IMF, which has neither analyzed the role of SAFE policy bank financing, nor highlighted the glaring gap in China’s own reporting). But the work of AidData points to nearly $1 trillion in foreign assets, with a hefty dollar share.
The available data sources all suggest that the bulk of the foreign assets of the state banks are in dollars.
Put simply, SAFE’s static dollar holdings aren’t the important story.
The real story is the rapid growth of the state banks dollar holdings.
Japan holds a high (though undisclosed) dollar share in its FX reserves, and those reserves are primarily invested in Treasuries—so Japan’s MoF is now clearly the largest contributor to the U.S. data on foreign official holdings of Treasuries. (SAFE has shifted its funds out of U.S. custodians, and thus increasingly appears in the data as a “private” holder in a European custodial center)
The broad story is thus pretty clear: the growth in the world’s sovereign and quasi-sovereign assets is not coming through an increase in FX reserve holdings managed by the world’s central banks.
So don’t obsess about the dollar’s chare in formal FX reserves. Do recognize that the dollar’s “reserve currency role” isn’t the source of any significant new inflows into the dollar.
The dollar’s dominant role in the international monetary system depends on much more than the size and composition of central bank FX reserves. It is as much, perhaps more so (given that FX reserve managers are themselves ultimately liability matchers) a function of the portfolio choice of a set of private/semi-private/quasi-sovereign investors that are much more difficult to observe. Reserve currency status is not only about FX reserves in a strict sense.
That’s been true for some time. Most of the current flow into U.S. from the “official” sector is coming from investors who are not classic reserve managers.
Those flows remain heavily tilted toward the dollar, at least for now.***
And any real de-dollarization would likely occur first among these investors.
Put differently, the dollar’s global role is increasingly as a source of returns, not a source of safety. The foreign bid, private and public, is for risk, not for Treasuries. That doesn’t help Scott Bessent much right now, but it has helped keep valuations in the stock market extended. And the global debate on the dollar’s role lags the evolution in the dollar’s role, and the risks associated with that new role.
It is currently fashionable in some circles to point to the diminution of the “convenience yield” on Treasuries even while the U.S. dollar continues to enjoy such a privilege. But the shift in the global investor base, and their apparent portfolio preference for U.S. risk assets in lieu of Treasuries, may help explain the divergence between the convenience yield on UST and the convenience yield on USD.
And of course, if the negative convenience yield implies that Treasuries are trading at a historical discount, the persistence of the latter—and its concentration in risk assets—suggests that the “profit dollar” itself is likely trading at a historical premium. That apparent premium on U.S. risk assets deserves as much (or more) scrutiny as the currency composition of central bank FX reserves.
There is much more in the report including charts on Japan, South Korea, Taiwan, and Saudi Arabia.
So no, China is not dumping dollars. Nor is any other country.
“I Am the House”
Play that video. It’s amusing.
Bessent is working with Japan to stop it from selling treasuries. But that is not dumping treasuries in the normal meaning of the word.
Rather, Japan is selling treasuries to buy yen because the yen is collapsing.
The concern to Bessent is selling treasuries would drive up treasury yields. Well guess what.
Hoot of the Month
Bessent foolishly declared himself to be the House.
“I have asymmetric information. I am the house now. You can bet against me if you want.”
The bond market did.
We have steeply rising yields despite the fact that no country is selling treasuries or abandoning the dollar in any meaningful way, if at all.
The only way for the Fed to halt the bond market revolt other than massive QE at the long end of the curve is hike interest rates.
At 10:00 PM September 28, the 30-year long bond yield is 5.57 percent. And the 10-year note yield is 5.26 percent.
Yes, that is a problem for Bessent and the Fed.
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How does this process ever end? So, maybe US debt becomes 250% and 30 yr Treasuries pay 10% – so what? The Fed buys the debt and issues the currency and how does this ever end? Gold crashed 4% yesterday!
I am very happy that the bond vigilantes are slowly trying to rein in the US Congress and it’s spend thrift ways.
I just wish they had done this 5 years back…well as they say better late than never…