Empirical Evidence on Exchange Rates: Countries Allocate Dollars and Gold to Hedge Exchange Rate Volatility Risk
2026-07-10 20:51:39
Amidst ongoing geopolitical fragmentation and a profound restructuring of the global financial landscape, central banks worldwide are facing immense pressure from dual risks:
Political barriers and policy restrictions may lead to the freezing of traditional reserve assets held overseas, rendering them completely useless, thus forcing central banks to make political accessibility and legal security important allocation criteria.
The global financial market is still centered on the US dollar. Temporary shortages of US dollar funding will create a rigid demand for readily available US dollars, which can solve liquidity risks at critical times.
Why is the much-discussed "de-dollarization" not so easy?
Because the US dollar still monopolizes global trade settlement, cross-border financing, and monetary policy transmission.
For central banks around the world, the core objective is not to completely abandon the dollar, but to enhance the resilience of their financial systems to unexpected external policy shocks through a scientific reserve portfolio structure.
Data shows that although the share of the US dollar in global allocated reserves has continued to decline, it still ranks first; while the proportion of gold has continued to recover from its low level after the financial crisis, and the diversified layout characteristics are becoming more and more obvious.
The cross-border spillover of the Federal Reserve's monetary policy is the core source of global financial volatility.
When the Federal Reserve tightens monetary policy, rising yields on dollar assets drive asset rebalancing, global financial conditions tighten across the board, and non-dollar currencies depreciate.
For economies where businesses, banks, and sovereign entities hold large amounts of dollar-denominated debt, currency depreciation will directly increase the size of external debt denominated in the local currency, exacerbating debt pressure and financial risks.
An international study selected 108 Federal Reserve interest rate decisions from 2009 to 2023 and conducted an empirical study using minute-level high-frequency exchange rate data from 18 economies to examine the differentiated trends of the US dollar and gold. The study concluded that the Federal Reserve's policies have strong spillover effects and play a key hedging role in the reserve structure.
Strong spillover effect: Data shows that the Fed's unexpected 10 basis point tightening policy will cause non-US currencies to depreciate by an average of 0.4% within 20 minutes, and the exchange rate will not change in advance, so the impact is immediate.
The US dollar reserves have dedicated liquidity; for every standard deviation that the foreign exchange reserves exceed the sample mean, the depreciation of the domestic currency can be narrowed by 0.04 percentage points.
Among these measures, dollar reserves have the most significant hedging effect, potentially narrowing the depreciation rate by up to 0.1 percentage points. This is because dollar reserves can be directly used for foreign exchange market intervention, interbank lending, and asset pledging without the need for secondary exchange, making them the most direct tool for hedging against soaring global demand for dollars.
Gold reserves serve as a supplementary defense: for every standard deviation increase in the size of gold reserves, the rate of depreciation of the local currency also narrows by 0.04 percentage points.
Although the process of converting gold into cash is relatively complex (it needs to be activated through selling, swapping, pledging, etc.), it can enhance the risk resistance of central bank balance sheets by virtue of its own collateral value, valuation elasticity, and non-sovereign credit attributes.
Market expectations and signaling effect: The stabilizing effect of reserve assets comes not only from actual intervention, but also from the guidance of expectations.
An adequate reserve portfolio can strengthen market confidence in the central bank's ability to inject liquidity during crises, thus stabilizing exchange rate fluctuations through a deterrent effect.
The substitution effect of official liquidity tools: The Federal Reserve's dollar swap lines and the Foreign Monetary Authority Repurchase Facility (FIMA) are important crisis backstop mechanisms.
Empirical evidence shows that for countries that cannot access the Federal Reserve's official liquidity tools, their own dollar and gold reserves have a very strong buffering effect, with high reserves almost completely offsetting the impact of depreciation. However, for economies that have access to these tools, the additional stabilizing effect of their domestic reserves is significantly weakened. This means that for countries not in the US monetary system, increasing foreign exchange reserves is very effective in resisting exchange rate fluctuations, while it is not as urgent for countries within the US system.
Risk matching principle: The hedging effectiveness of reserves should be highly matched with a country's external risk exposure. For every 10 percentage point increase in the proportion of a country's USD-denominated external debt, the depreciation of the local currency under the same interest rate hike could increase by up to 0.2 percentage points.
In high-risk economies where dollar-denominated external debt is higher than the market median, the stabilizing effect of dollar and gold reserves on exchange rates is significantly amplified. This suggests that central banks can hedge against the vulnerability of domestic private and public sectors to dollar-denominated debt by optimizing their reserve structure.
Based on the above conclusions, central banks should follow three practical principles in reserve allocation and risk control:
Implement a tiered allocation strategy for reserve assets: Countries outside the dollar-based social circle will actively allocate assets to the dollar and gold.
The first tier consists of highly liquid emergency assets, primarily in US dollar assets, to ensure immediate redemption and intervention capabilities in extreme market conditions.
The second layer consists of risk hedging and value-added assets, including allocating safe-haven assets such as gold to hedge against geopolitical and single-currency risks.
A rational view of official liquidity tools: The Federal Reserve's swap and repurchase facilities are not universally applicable mechanisms; they have selective access and additional conditions. They can serve as supplements, but cannot replace a robust domestic financing system and prudent management of unhedged foreign currency debt.
Objectively define gold's safe-haven status: avoid over-glorifying the value of gold.
Gold has no fixed interest income, its price fluctuates wildly, and its storage and liquidation costs are high. Although experiments show that it can better resist exchange rate fluctuations, blindly pursuing the return of physical gold may reduce custody risks, but it will weaken the liquidity and practical value of the asset.
Geopolitical divisions have reshaped the optimal global reserve allocation model, while the dollar's core position in the global financial system is unlikely to be overturned in order to ensure exchange rate stability.
The core direction of reform in the current global reserve system is not simply "de-dollarization ," but rather the construction of a composite reserve system that is "backed by dollar liquidity, hedged against geopolitical risks by gold, supported by official tools, and empowered by local risk control."
Only by matching the structure of reserve assets with the country's external risk exposure, and taking into account liquidity, security and diversification, can we effectively resist the cross-border spillover impact of the Federal Reserve's monetary policy.
Political barriers and policy restrictions may lead to the freezing of traditional reserve assets held overseas, rendering them completely useless, thus forcing central banks to make political accessibility and legal security important allocation criteria.
The global financial market is still centered on the US dollar. Temporary shortages of US dollar funding will create a rigid demand for readily available US dollars, which can solve liquidity risks at critical times.
The dual risks are forcing the global reserve system to undergo structural changes.
Why is the much-discussed "de-dollarization" not so easy?
Because the US dollar still monopolizes global trade settlement, cross-border financing, and monetary policy transmission.
For central banks around the world, the core objective is not to completely abandon the dollar, but to enhance the resilience of their financial systems to unexpected external policy shocks through a scientific reserve portfolio structure.
Data shows that although the share of the US dollar in global allocated reserves has continued to decline, it still ranks first; while the proportion of gold has continued to recover from its low level after the financial crisis, and the diversified layout characteristics are becoming more and more obvious.
Federal Reserve Policy Spillover Mechanism and Empirical Design
The cross-border spillover of the Federal Reserve's monetary policy is the core source of global financial volatility.
When the Federal Reserve tightens monetary policy, rising yields on dollar assets drive asset rebalancing, global financial conditions tighten across the board, and non-dollar currencies depreciate.
For economies where businesses, banks, and sovereign entities hold large amounts of dollar-denominated debt, currency depreciation will directly increase the size of external debt denominated in the local currency, exacerbating debt pressure and financial risks.
An international study selected 108 Federal Reserve interest rate decisions from 2009 to 2023 and conducted an empirical study using minute-level high-frequency exchange rate data from 18 economies to examine the differentiated trends of the US dollar and gold. The study concluded that the Federal Reserve's policies have strong spillover effects and play a key hedging role in the reserve structure.
Strong spillover effect: Data shows that the Fed's unexpected 10 basis point tightening policy will cause non-US currencies to depreciate by an average of 0.4% within 20 minutes, and the exchange rate will not change in advance, so the impact is immediate.
The US dollar reserves have dedicated liquidity; for every standard deviation that the foreign exchange reserves exceed the sample mean, the depreciation of the domestic currency can be narrowed by 0.04 percentage points.
Among these measures, dollar reserves have the most significant hedging effect, potentially narrowing the depreciation rate by up to 0.1 percentage points. This is because dollar reserves can be directly used for foreign exchange market intervention, interbank lending, and asset pledging without the need for secondary exchange, making them the most direct tool for hedging against soaring global demand for dollars.
Gold reserves serve as a supplementary defense: for every standard deviation increase in the size of gold reserves, the rate of depreciation of the local currency also narrows by 0.04 percentage points.
Although the process of converting gold into cash is relatively complex (it needs to be activated through selling, swapping, pledging, etc.), it can enhance the risk resistance of central bank balance sheets by virtue of its own collateral value, valuation elasticity, and non-sovereign credit attributes.
Market expectations and signaling effect: The stabilizing effect of reserve assets comes not only from actual intervention, but also from the guidance of expectations.
An adequate reserve portfolio can strengthen market confidence in the central bank's ability to inject liquidity during crises, thus stabilizing exchange rate fluctuations through a deterrent effect.
Mechanism Heterogeneity: Official Instrument Substitution and External Debt Matching
The substitution effect of official liquidity tools: The Federal Reserve's dollar swap lines and the Foreign Monetary Authority Repurchase Facility (FIMA) are important crisis backstop mechanisms.
Empirical evidence shows that for countries that cannot access the Federal Reserve's official liquidity tools, their own dollar and gold reserves have a very strong buffering effect, with high reserves almost completely offsetting the impact of depreciation. However, for economies that have access to these tools, the additional stabilizing effect of their domestic reserves is significantly weakened. This means that for countries not in the US monetary system, increasing foreign exchange reserves is very effective in resisting exchange rate fluctuations, while it is not as urgent for countries within the US system.
Risk matching principle: The hedging effectiveness of reserves should be highly matched with a country's external risk exposure. For every 10 percentage point increase in the proportion of a country's USD-denominated external debt, the depreciation of the local currency under the same interest rate hike could increase by up to 0.2 percentage points.
In high-risk economies where dollar-denominated external debt is higher than the market median, the stabilizing effect of dollar and gold reserves on exchange rates is significantly amplified. This suggests that central banks can hedge against the vulnerability of domestic private and public sectors to dollar-denominated debt by optimizing their reserve structure.
Policy Implications: Constructing a Composite Reserve Allocation System
Based on the above conclusions, central banks should follow three practical principles in reserve allocation and risk control:
Implement a tiered allocation strategy for reserve assets: Countries outside the dollar-based social circle will actively allocate assets to the dollar and gold.
The first tier consists of highly liquid emergency assets, primarily in US dollar assets, to ensure immediate redemption and intervention capabilities in extreme market conditions.
The second layer consists of risk hedging and value-added assets, including allocating safe-haven assets such as gold to hedge against geopolitical and single-currency risks.
A rational view of official liquidity tools: The Federal Reserve's swap and repurchase facilities are not universally applicable mechanisms; they have selective access and additional conditions. They can serve as supplements, but cannot replace a robust domestic financing system and prudent management of unhedged foreign currency debt.
Objectively define gold's safe-haven status: avoid over-glorifying the value of gold.
Gold has no fixed interest income, its price fluctuates wildly, and its storage and liquidation costs are high. Although experiments show that it can better resist exchange rate fluctuations, blindly pursuing the return of physical gold may reduce custody risks, but it will weaken the liquidity and practical value of the asset.
in conclusion:
Geopolitical divisions have reshaped the optimal global reserve allocation model, while the dollar's core position in the global financial system is unlikely to be overturned in order to ensure exchange rate stability.
The core direction of reform in the current global reserve system is not simply "de-dollarization ," but rather the construction of a composite reserve system that is "backed by dollar liquidity, hedged against geopolitical risks by gold, supported by official tools, and empowered by local risk control."
Only by matching the structure of reserve assets with the country's external risk exposure, and taking into account liquidity, security and diversification, can we effectively resist the cross-border spillover impact of the Federal Reserve's monetary policy.
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