Central banks think the US has become riskier. They plan to sell dollars and buy gold

Global Shift in Currency Preferences: Central Banks Reassess US Dollar’s Role Amid Rising Geopolitical Risks

Central banks think the US has become – Central banks are increasingly prioritizing diversification in their foreign exchange reserves, with more institutions planning to reduce their dollar holdings than expand them for the first time in recent history. According to a comprehensive global survey, this trend reflects heightened concerns over the United States’ role in escalating geopolitical tensions. The shift marks a significant departure from previous patterns, as the perceived risks associated with American economic and political policies are pushing governments to explore alternatives to the greenback.

Survey Highlights: A New Era of Currency Diversification

The findings, released Tuesday, stem from a survey conducted by the Official Monetary and Financial Institutions Forum (OMFIF), an independent research group based in London. Spanning March to May, the study gathered input from 74 central banks worldwide, revealing a notable change in investment strategies. For the first time since OMFIF began tracking these intentions in 2023, the desire to decrease dollar allocations has surpassed the intent to increase them, signaling a broader realignment in global financial priorities.

“This year, geopolitics has overtaken the US political environment in discouraging investment in the dollar, reflecting the perceived role of the US in elevating geopolitical risk,” the OMFIF report stated.

The survey underscores a growing sentiment that the US dollar is no longer the sole anchor for international trade and reserves. While the dollar remains dominant—accounting for approximately 58% of central banks’ allocations over the past five years—there is a clear momentum toward alternatives. Andrea Correa, head of research at OMFIF, noted that this gradual movement is evident in the increased interest in the euro and the renminbi, which are seen as viable substitutes for the US currency.

Geopolitical Tensions and Policy Uncertainty

The evolving stance of central banks comes amid a backdrop of escalating global conflicts and shifting economic priorities. The ongoing Middle East war, which the United States has played a pivotal role in, has disrupted energy markets and raised questions about the stability of the international system. Additionally, President Donald Trump’s push for new tariffs has highlighted the unpredictability of US foreign policy, further contributing to the perception of risk.

These factors have created an environment where central banks are more cautious about their reliance on the dollar. The OMFIF report highlights how the combination of military interventions, economic sanctions, and trade disputes has made the US a more volatile player on the world stage. As a result, financial institutions are recalibrating their portfolios to mitigate exposure to potential disruptions in the American-led economic order.

Emerging Currencies Gain Traction

While the dollar remains the most widely used currency in global transactions, the survey reveals a gradual but measurable shift toward other major currencies. The euro, in particular, has emerged as a compelling option, with two-thirds of respondents indicating a stronger preference for its use in international trade compared to 43% last year. This represents a 7% increase in the proportion of central banks favoring the euro, according to the report.

Similarly, the Chinese yuan has gained traction as a diversification tool. Nearly all central banks surveyed view the renminbi as a valuable alternative, citing its growing influence in global markets. The rise of the euro and renminbi is part of a broader movement toward de-dollarization, which seeks to reduce the dominance of the US currency in international commerce. This trend is expected to continue as more nations seek to insulate themselves from US-led financial fluctuations.

Other currencies, such as the Singapore dollar, South Korean won, and South African rand, are also seeing increased demand. While these currencies may not yet rival the dollar in scale, their appeal is growing among central banks looking to balance their portfolios with regional or alternative assets. The report emphasizes that this diversification is not about abandoning the dollar entirely but rather about reducing its singular role in global finance.

Gold as a Hedge Against Uncertainty

Amid these shifts, gold has become a central component of central banks’ strategies to hedge against geopolitical risks and economic instability. A record number of institutions now plan to boost their gold reserves, even as prices have risen by over 20% in the past year. This surge in gold investments underscores its perceived value as a safe asset in times of uncertainty.

“The shift has been driven by protection against geopolitical risk and growing doubts about the stability of the international monetary system,” the report added.

Gold’s role as a store of value has intensified, with 51% of central banks citing it as a key reason for increasing holdings. This percentage rose by 11 points from 2024, reflecting a renewed focus on commodities as a buffer against currency volatility. The demand for gold is also tied to its historical reliability as a hedge against inflation and market crashes, which has become more critical in the current climate.

The report further notes that gold is increasingly being integrated into broader asset management frameworks. As central banks navigate a more fragmented global economy, they are turning to precious metals to complement their traditional reserve currencies. This trend is expected to accelerate, especially as geopolitical tensions persist and the US continues to shape the international financial landscape through policy decisions and trade practices.

The Road Ahead for Global Finance

While the dollar’s decline is gradual, the survey highlights a clear trajectory toward a more multipolar financial system. The OMFIF findings suggest that central banks are not only reacting to immediate risks but also planning for long-term stability. This includes a deliberate effort to spread risk across multiple currencies and assets, reducing dependency on any single entity.

However, the dollar’s resilience remains a key factor in global markets. Despite the push for diversification, the currency continues to dominate portfolios, with its share in foreign exchange reserves hovering near 58%. This suggests that while central banks are exploring alternatives, the dollar’s entrenched position in the global economy is still strong.

The implications of this transition are significant for the US and its allies. As the dollar’s influence wanes, the US may face challenges in maintaining its economic leadership, while countries like China and Germany could see enhanced roles in shaping international financial norms. The OMFIF report serves as a timely reminder of the dynamic forces reshaping the global monetary system, with central banks at the forefront of this transformation.