Why Countries Hoard Dollars: Global Foreign-Exchange Reserves in 2025

What Reserves Really Mean

When people talk about national wealth, they often point to GDP, debt or sovereign funds. But one quieter line on central-bank balance sheets matters just as much in a crisis: foreign-exchange (FX) reserves.

These are foreign-currency assets — cash, sovereign bonds, gold, IMF positions — that a country holds to defend its currency, pay for imports, service external debt, and calm markets. By 2025, global reserves are still dominated by the U.S. dollar, but subtle shifts are underway.

What FX Reserves Do (and Why Policymakers Care)

Reserves are the central bank’s insurance policy. They are used to:

In short: reserves are both monetary firepower and psychological stability tools.

Why the U.S. Dollar Dominates

Despite recurring debates about “de-dollarization,” the U.S. dollar remains the anchor of global reserves. Reasons include:

That’s why central banks, even when they diversify, keep over half of their reserves in dollars.

Does the U.S. Hold Reserves?

Ironically, the United States itself does not need large FX reserves. Why? Because it issues the world’s reserve currency.

  • The U.S. can borrow in its own currency and settle obligations by printing dollars.

  • Its official reserves (gold and SDRs) are small compared to countries like China or Japan.

  • Instead of reserves, the U.S. provides the safe assets that other countries hoard.

This “exorbitant privilege” is exactly why the dollar system persists.

Who Holds the Most? (2025 Rankings)

The largest reserve holders are typically export-oriented or financially open economies:

  • China — still the world’s biggest holder, with reserves in the trillions. Used to stabilize the yuan and provide geopolitical buffer.

  • Japan — huge reserves to smooth yen volatility in one of the world’s most liquid FX markets.

  • Switzerland — defends monetary stability against safe-haven inflows.

  • India — builds buffers to cover imports and sudden capital outflows.

  • Oil exporters — stockpile reserves from commodity surpluses.

What Currencies Make Up Reserves?

Not all reserves are equal. The composition matters:

  • U.S. dollar — still well over 50% of allocated reserves.

  • Euro & yen — major secondary currencies.

  • Renminbi (RMB) — still small (~3%), but growing slowly as China pushes for internationalization.

  • Others — Canadian, Australian dollar, Swiss franc — marginal shares, often linked to trade ties.

Instruments

Reserves are mostly invested in:

  • U.S. Treasuries

  • German Bunds

  • Other highly rated government debt

Central banks accept low returns in exchange for liquidity and safety.

Case Studies: Different Strategic Logics

  • China: A giant buffer, but also geopolitical leverage. Slightly reducing Treasuries, diversifying cautiously.

  • Japan & Switzerland: Focused on stability, holding ultra-liquid bonds.

  • India: Reserves as insurance against capital flight and import shocks.

  • Crisis cases (Greece, Argentina): Show what happens when reserves are too thin — external shocks force painful restructurings.

The Tradeoffs in Reserve Management

  • Safety vs. yield: Treasuries are safe but low-yielding. Some central banks cautiously move into riskier assets.

  • Currency risk & geopolitics: Holding USD exposes countries to U.S. monetary policy and sanctions risk.

  • Opportunity cost: Huge reserves mean less money for domestic investment, but governments accept the cost as “insurance.”

Recent Trends to Watch (2024–2025)

  • Slow diversification: IMF data shows a gradual rise in RMB and AUD allocations, but dollar dominance endures.

  • Surging Treasury demand: 2025 saw record foreign holdings of U.S. Treasuries.

  • More transparency: G7 nations push for disclosure of interventions to avoid competitive devaluations.

 Stability with Nuance

Foreign-exchange reserves are insurance, strategy, and power. In 2025, the dollar remains king, but marginal diversification continues.

For emerging markets, reserves are lifelines against volatility. For the U.S., they are symbols of privilege, since the world still trusts and demands its assets.

The global reserve system is evolving — but slowly. Until another currency matches the dollar’s depth, liquidity, and trust, the greenback will remain the bedrock of global finance.

References

  • IMF COFER dataset – data.imf.org

  • IMF blog: Dollar’s share of reserves held steady in Q2 2025

  • Reuters (2025): Yuan and Aussie dollar gain share as dollar dips

  • Reuters (2025): Foreign holdings of U.S. Treasuries hit all-time high

  • Investopedia: Understanding foreign exchange reserves

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