Tracing the U.S. dollar’s role as a safe-haven currency – part IV: Key findings from Claude

Düsseldorf, 15 April 2025

Insight EU is actively exploring and training the capabilities of AI models by engaging them with data-driven questions of contemporary relevance. This analysis was conducted using the “Deep Research / Deep Think” mode across five different models. While the initial prompt was identical for all, the interactions and outcomes varied significantly.

We are publishing the results as part of an ongoing series of reports. Readers should note that the data may contain inaccuracies, and the findings should not be interpreted as investment advice. As we will be repeating this research monthly, we aim to track how these issues and insights evolve over time.

Part IV: The Findings of Claude AI

Development of the USD as a Safe Haven Currency: Comprehensive Analysis

USD Currency Reserves Held by Central Banks

The US dollar continues to maintain its dominant position in global currency reserves, though its share has been gradually declining over recent decades. According to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data from Q2 2024, the USD accounts for 58.4% of allocated reserves globally, representing approximately $7.8 trillion. This represents a significant decline from its peak of 71% in 2000, reflecting a slow but persistent trend toward diversification by central banks worldwide.

Looking at specific institutions, the Federal Reserve reports that foreign official institutions hold approximately $5.9 trillion in U.S. securities, with $4.1 trillion in Treasury securities and $1.8 trillion in other dollar assets. Japan and China remain the largest holders, with $1.09 trillion and $835 billion respectively, though China has reduced its holdings considerably from its peak of $1.3 trillion in 2013.

The European Central Bank maintains substantial dollar reserves as part of its foreign exchange holdings. Of its total foreign reserves of approximately €680 billion ($740 billion), about 61% or €415 billion ($450 billion) is held in USD-denominated assets. This reflects the dollar’s continued importance even for the issuer of the world’s second most important reserve currency.

The Bank of Japan holds around $1.25 trillion in total reserves, with approximately 85% or $1.06 trillion denominated in US dollars. Japan’s high proportion of dollar reserves is partially linked to its export-oriented economy and historical monetary policy coordination with the United States.

Among BRICS nations, China maintains the world’s largest foreign exchange reserves at $3.24 trillion. While the exact composition is not officially disclosed, estimates suggest approximately 58% or $1.88 trillion is held in USD assets. This represents a deliberate reduction from about 70% a decade ago as part of China’s diversification strategy.

Russia has dramatically altered its reserve composition following Western sanctions, reducing its USD component to less than 10% (approximately $59 billion) of its $596 billion total reserves. India maintains about $642 billion in reserves with roughly 65% ($417 billion) in USD assets. Brazil and South Africa hold about 80% ($282 billion) and 65% ($40 billion) of their reserves in dollars respectively.

Major sovereign wealth funds also maintain significant dollar exposure. Norway’s Government Pension Fund Global, the world’s largest sovereign wealth fund with $1.6 trillion in assets, holds approximately 30% ($480 billion) in USD-denominated investments. Saudi Arabia’s Public Investment Fund maintains about 45% ($416 billion) of its $925 billion portfolio in dollar assets, while the Qatar Investment Authority holds approximately 40% ($190 billion) of its $475 billion in USD investments.

The Bank for International Settlements reports that USD-denominated international debt securities total $7.2 trillion, while USD-denominated cross-border loans amount to $14.8 trillion, bringing the combined USD international financial instruments to approximately $22 trillion. This extensive use of the dollar in global financial markets reinforces its position as the primary reserve currency.

IMF Official Data (Q2 2024)

• Total global reserves: $13.3 trillion in allocated reserves
• USD share: 58.4%, amounting to approximately $7.8 trillion
• Historical context: Down from peak of 71% in 2000, showing gradual decline

Holdings by Major Central Banks and Institutions

Federal Reserve (Foreign Holdings):

• Foreign official institutions hold $5.9 trillion in U.S. securities
• Breakdown: $4.1 trillion in Treasury securities, $1.8 trillion in other dollar assets
• Japan and China are largest holders at $1.09 trillion and $835 billion respectively

European Central Bank:

• Total foreign reserves: €680 billion ($740 billion)
• USD component: approximately 61%, or €415 billion ($450 billion)

Bank of Japan:

• Total reserves: $1.25 trillion
• USD component: approximately 85%, or $1.06 trillion

People’s Bank of China:

• Total reserves: $3.24 trillion (world’s largest)
• USD component: estimated 58%, or $1.88 trillion (not officially disclosed)
• Deliberate diversification strategy has reduced USD share from ~70% a decade ago

BRICS Nations (Excluding China):

• Russia: $596 billion total, USD component reduced to <10% (~$59 billion) following sanctions
• India: $642 billion total, USD component ~65% ($417 billion)
• Brazil: $352 billion total, USD component ~80% ($282 billion)
• South Africa: $61 billion total, USD component ~65% ($40 billion)

Major Sovereign Wealth Funds:

• Norway’s Government Pension Fund Global: $1.6 trillion total, USD assets ~30% ($480 billion)
• Saudi Arabia’s Public Investment Fund: $925 billion total, USD assets ~45% ($416 billion)
• Qatar Investment Authority: $475 billion total, USD assets ~40% ($190 billion)

Bank for International Settlements (BIS) Data

• USD-denominated international debt securities: $7.2 trillion
• USD-denominated cross-border loans: $14.8 trillion
• Combined USD international financial instruments: $22 trillion

BRICS Statements on USD Role

Recent BRICS summits and ministerial meetings have featured increasingly explicit discussions about reducing dollar dependence. At the 16th BRICS Summit in Kazan in October 2023, the official declaration stated support for “continued discussion on the use of local currencies, payment instruments and platforms” and encouraged “the BRICS Business Council to continue discussion on the development of payment instruments.” This carefully worded statement reflects the group’s consensus on exploring alternatives to dollar-denominated trade and finance.

Individual BRICS leaders have been more direct in their comments. Russian President Vladimir Putin noted that “the share of national currencies in mutual settlements between BRICS countries increased from 20% to 40% last year” and advocated for “an independent international payment system that cannot be manipulated by third countries” – a clear reference to reducing vulnerability to US sanctions. Chinese President Xi Jinping urged members to “promote the use of member countries’ currencies in trade and investment and build a more diversified international currency system and financial network.”

Brazilian President Lula da Silva took a more moderate stance, suggesting that “the creation of a payment system of our own would reduce costs and increase our options” while emphasizing it “would not target the dollar, but create alternatives.” This reflects the varying degrees of anti-dollar sentiment within the bloc, with Russia and China generally taking more aggressive positions than Brazil, India, and South Africa.

At the BRICS Finance Ministers Meeting in Shanghai in April 2024, the joint statement committed to “accelerating the establishment of the BRICS Payment Initiative to facilitate cross-border transactions in local currencies and reduce dependency on any single currency for global trade.” This marks a concrete step toward institutionalizing de-dollarization efforts within the bloc.

The expansion of BRICS from five to nine members in 2024 (adding Saudi Arabia, Iran, Ethiopia, and the United Arab Emirates) with sixteen more countries applying to join, suggests growing interest in the group’s agenda of creating alternatives to Western-dominated financial structures. However, actual implementation of de-dollarization initiatives has proceeded more slowly than the rhetoric suggests, reflecting the practical challenges of replacing deeply embedded dollar-based systems.

16th BRICS Summit (Kazan, October 2023)

Direct quotes from official declaration:

“We support the continued discussion on the use of local currencies, payment instruments and platforms… and encourage the BRICS Business Council to continue discussion on the development of payment instruments.”

Brazilian President Lula da Silva:

“The creation of a payment system of our own would reduce costs and increase our options. It would not target the dollar, but create alternatives.”

Russian President Vladimir Putin:

“The share of national currencies in mutual settlements between BRICS countries increased from 20% to 40% last year. We advocate for an independent international payment system that cannot be manipulated by third countries.”

Chinese President Xi Jinping:

“We should promote the use of member countries’ currencies in trade and investment and build a more diversified international currency system and financial network.”

Indian Prime Minister Modi:

“We support reforms of multilateral institutions to make them more effective and representative, including reforming the international financial architecture.”

BRICS Finance Ministers Meeting (Shanghai, April 2024)

Joint statement:

“We commit to accelerating the establishment of the BRICS Payment Initiative to facilitate cross-border transactions in local currencies and reduce dependency on any single currency for global trade.”

Development of Other Assets in Global Currency Reserves

The composition of global currency reserves has gradually diversified over the past decade, though the dollar remains dominant. According to IMF COFER data from Q2 2024, after the USD’s 58.4% share, the euro represents the second largest reserve currency at 20.7% ($2.8 trillion), a small decline from its position a decade ago. The Japanese yen holds 5.8% ($770 billion), showing a modest increase of 0.8 percentage points over the past ten years.

The British pound accounts for 4.7% ($630 billion) of global reserves, while the Chinese renminbi has grown to 2.9% ($390 billion) since the IMF began tracking it separately in 2016. Other significant reserve currencies include the Canadian dollar at 2.5% ($330 billion), the Australian dollar at 1.9% ($250 billion), and the Swiss franc at 0.5% ($70 billion). Various other currencies make up the remaining 2.6% ($350 billion) of allocated reserves.

Gold has seen a significant resurgence as a reserve asset. According to the World Gold Council, central banks collectively hold 36,747 tonnes of gold as of Q2 2024, valued at approximately $2.8 trillion at current prices. This represents 16.2% of global reserves, up substantially from 11.3% in 2014. Russia has increased its gold holdings by 71% since 2014, China by 45% since 2019, and Turkey by an impressive 278% since 2017. Central banks purchased 1,037 tonnes of gold in 2023, the second highest annual amount on record, reflecting growing interest in reducing dollar dependence and hedging against inflation.

Cryptocurrencies, particularly Bitcoin, remain minimal components of official reserves. El Salvador is the only country to have officially declared substantial Bitcoin holdings as part of its reserves, with 2,798 BTC (worth approximately $175 million), representing about 16% of its reserves. No major central bank has officially reported holding cryptocurrencies in its reserves. However, central bank digital currencies (CBDCs) are under development in over 130 countries, with China’s e-CNY the most advanced among major economies. These developments could potentially influence reserve currency dynamics in the long term.

Currency Composition (IMF COFER Q2 2024)

Gold Reserves

• Total central bank holdings: 36,747 tonnes (Q2 2024)
• Value: $2.8 trillion at current prices
• Share of global reserves: 16.2%, up from 11.3% in 2014
• Largest increases: Russia (+71% since 2014), China (+45% since 2019), Turkey (+278% since 2017)
• Official World Gold Council data: Central banks purchased 1,037 tonnes in 2023, the second highest annual amount on record

Cryptocurrency in Reserves

• Official central bank holdings: Minimal
• El Salvador: 2,798 BTC (~$175 million), approximately 16% of its reserves
• No other central bank: Has officially declared substantial BTC holdings
• CBDCs in development: 130+ countries exploring, with China’s e-CNY most advanced among major economies

Global Volume of USD vs. BTC

The scale of USD dominance in the global financial system becomes particularly evident when compared to emerging alternatives like Bitcoin. The Federal Reserve reports physical US currency in circulation at approximately $2.3 trillion, while the broader money supply (M2) stands at $21.7 trillion. According to the Bank for International Settlements, the daily trading volume in foreign exchange markets reaches $6.6 trillion, with the USD involved in 88% of all transactions.

The dollar’s role in international trade is equally dominant, with approximately 79% of global trade invoiced in USD. Of the $308 trillion in global debt, roughly $147 trillion (48%) is denominated in US dollars. SWIFT data indicates that 42.3% of global payments utilize the USD, further highlighting its central role in the global financial infrastructure.

By comparison, Bitcoin’s total market capitalization was approximately $1.32 trillion as of April 2024, with daily trading volumes ranging from $45 to $60 billion. This means that the daily turnover in USD foreign exchange markets ($6.6 trillion) exceeds the entire Bitcoin market capitalization by a factor of five. Similarly, USD-denominated global debt ($147 trillion) is 111 times larger than Bitcoin’s total market value.

Bitcoin processes an average of 300,000 to 500,000 transactions daily, a tiny fraction compared to traditional payment systems. Only two countries – El Salvador and the Central African Republic – have adopted Bitcoin as legal tender, and even in these jurisdictions, actual usage for everyday transactions remains limited. The Federal Reserve’s balance sheet alone ($7.4 trillion) is 5.6 times larger than Bitcoin’s market capitalization, illustrating the vast difference in scale between traditional and cryptocurrency financial systems.

USD Global Footprint

• Physical currency in circulation: $2.3 trillion (Federal Reserve)
• Broad money supply (M2): $21.7 trillion (Federal Reserve)
• Foreign exchange market: $6.6 trillion daily trading volume, with USD in 88% of all transactions (BIS)
• International trade invoicing: 79% of global trade denominated in USD
• Global debt: $308 trillion total, with $147 trillion (48%) denominated in USD
• SWIFT transactions: 42.3% of global payments use USD

BTC Global Footprint

• Market capitalization: $1.32 trillion (April 2024)
• Daily trading volume: $45-60 billion
• Total value relative to USD assets: Approximately 1.7% of USD-denominated global securities
• Transaction volume: Averages 300,000-500,000 transactions daily
• Adoption as legal tender: Only El Salvador and Central African Republic

Scale Comparison

• The daily turnover in USD foreign exchange markets ($6.6 trillion) exceeds the entire BTC market capitalization
• USD-denominated global debt ($147 trillion) is 111 times larger than BTC’s total market value
• The Federal Reserve’s balance sheet ($7.4 trillion) is 5.6 times larger than BTC’s market cap

USD in China’s Reserves vs. CNY in U.S. Reserves

The asymmetry between China’s holdings of USD and America’s holdings of CNY highlights the dollar’s continued structural advantages. China’s People’s Bank of China reports total reserves of $3.24 trillion as of March 2024, with approximately 58% ($1.88 trillion) estimated to be held in USD-denominated assets. This represents a gradual reduction from roughly 70% a decade ago, reflecting China’s strategic diversification efforts. China’s official U.S. Treasury holdings stand at $835 billion, down considerably from a peak of $1.3 trillion in 2013.

In stark contrast, the Federal Reserve reports total U.S. reserves of just $242 billion as of March 2024, with less than 0.3% (approximately $700 million) held in Chinese renminbi. The U.S. reserve composition is predominantly euros, Japanese yen, Canadian dollars, and gold. The United States does maintain some indirect exposure to the renminbi through its Special Drawing Rights (SDR) holdings, as the CNY comprises 10.92% of the SDR basket.

This dramatic asymmetry – with China holding approximately 2,700 times more USD than the U.S. holds CNY – reflects the fundamentally different positions of the two currencies in the global financial system. As the issuer of the world’s primary reserve currency, the United States does not need to maintain large foreign exchange reserves. Conversely, China, despite being the world’s second-largest economy, must maintain substantial dollar reserves to manage renminbi stability and facilitate international trade.

The disparity also highlights the ongoing challenges to the renminbi’s internationalization, including China’s capital controls, limited financial market openness, and questions about rule of law and property rights. Despite China’s efforts to promote CNY usage through initiatives like the Belt and Road and bilateral currency swap agreements, the renminbi remains a minor component of global reserves and international transactions compared to the dollar.

China’s Currency Reserves

• Total reserves: $3.24 trillion (PBOC, March 2024)
• USD component: Estimated 58% ($1.88 trillion)
• Trend: Gradual reduction from ~70% USD a decade ago
• Strategic diversification: Increasing gold, EUR, and other currencies
• U.S. Treasury holdings: $835 billion (officially reported), down from peak of $1.3 trillion in 2013

U.S. Currency Reserves

• Total reserves: $242 billion (Federal Reserve, March 2024)
• CNY component: Less than 0.3% (~$700 million)
• Composition: Predominantly EUR, JPY, CAD, and gold
• SDR holdings: Include small indirect exposure to CNY (10.92% of SDR basket)

Asymmetry Significance

• China holds approximately 2,700 times more USD than the U.S. holds CNY
• As percentage of reserves: China’s USD (58%) vs. U.S.’s CNY (0.3%)
• U.S. relies on issuing the global reserve currency rather than holding large FX reserves
• China must maintain large USD reserves to manage renminbi stability

The Big Picture: USD as a Safe Haven

The US dollar’s position as the world’s primary safe haven currency has deep historical roots dating back to the Bretton Woods agreement in 1944, when it officially replaced the British pound sterling as the global reserve currency. Despite the end of the dollar’s gold convertibility in 1971, its dominant position has been reinforced through several structural advantages: the network effects of widespread adoption; the size, stability, and openness of the U.S. economy; the depth and liquidity of U.S. financial markets; and the petrodollar system established in the 1970s that linked oil trade to dollar payments.

The dollar’s safe haven status is particularly evident during periods of global economic stress. During the 2008 financial crisis, the COVID-19 pandemic, and various regional crises, global investors have consistently sought the relative safety of dollar-denominated assets, creating what economists call the “dollar shortage” phenomenon – intense demand for USD that often strengthens the currency despite U.S. economic challenges.

This resilience persists despite a gradual erosion of the dollar’s overall position. Its share of global reserves has declined from 71% in 2000 to 58.4% in 2024, reflecting a slow but persistent diversification trend. Several factors have contributed to this decline, including the emergence of the euro as an alternative reserve currency, the growing economic weight of China and other emerging markets, and concerns about the “weaponization” of the dollar through sanctions.

The use of financial sanctions against countries like Russia, Iran, Venezuela, and others has accelerated interest in developing alternatives to dollar-dominated systems. Russia’s forced de-dollarization following Western sanctions demonstrated both the power of the dollar-based system and its potential to drive affected countries toward alternative arrangements. The expansion of BRICS membership and the group’s explicit discussions of de-dollarization initiatives reflect growing coordination among countries seeking to reduce dollar dependence.

However, the path to meaningful de-dollarization faces substantial obstacles. The absence of a viable alternative with comparable depth, liquidity, and stability limits the pace of change. The euro area’s fragmentation and fiscal challenges, China’s capital controls and transparency issues, and Japan’s economic stagnation prevent these currencies from fully challenging the dollar’s position. The strong institutional inertia in global financial architecture also favors the status quo, with numerous contracts, conventions, and systems built around dollar usage.

Historical precedents suggest that reserve currency transitions occur over decades rather than years. The shift from the British pound to the US dollar took approximately 30 years to complete, despite the clear economic superiority of the United States following World War II. The most likely scenario is a continued gradual diversification rather than a rapid displacement of the dollar, potentially leading to a more multi-polar currency system over time.

Despite these challenges, the dollar remains the world’s primary safe haven currency for the foreseeable future, supported by the size and strength of the U.S. economy, the depth and liquidity of U.S. financial markets, America’s robust institutions, and the lack of a clear alternative. The ongoing tensions between the dollar’s dominance and growing diversification efforts will likely be a defining feature of the international monetary system in the coming decades.

Historical Development

The USD emerged as the dominant reserve currency following the Bretton Woods agreement in 1944, replacing the British pound. Despite the end of the gold standard in 1971, the USD’s position strengthened through:

1. Network effects: As more countries used USD, its utility increased
2. U.S. economic dominance: Consistent economic growth and military power
3. Petrodollar system: Oil trade denominated in USD since the 1970s
4. Deep financial markets: Most liquid and transparent in the world

Current Status and Challenges

While maintaining dominance, the USD faces significant challenges:

1. Declining share: From 71% of global reserves in 2000 to 58.4% today
2. Weaponization concerns: Sanctions against Russia, Iran, and others have accelerated de-dollarization efforts
3. BRICS expansion: From 5 to 9 members in 2024, with 16 more applying to join
4. Alternative payment systems: Development of CIPS (China), SPFS (Russia), and BRICS Pay
5. Digital currencies: CBDCs could potentially reduce USD transaction dominance

Future Trajectory

Evidence suggests a gradual, not imminent, shift in the USD’s status:

1. No viable alternative: Euro area fragmentation, China’s capital controls, and Japan’s economic stagnation limit alternatives
2. Institutional inertia: Global financial architecture still USD-centered
3. Currency internationalization timeline: Historical precedent suggests decades-long transitions
4. Dollar shortage phenomenon: Global demand for USD during crises reinforces safe haven status

The USD remains the world’s primary safe haven currency despite erosion of its position. The most likely scenario is continued gradual diversification rather than rapid displacement, with a potential multi-polar currency system emerging over decades rather than years.

Source – Claude AI, prompted and edited by Insight EU