Central Banks Eye Gold, Euro and Yuan as Dollar Dominance Wanes

Why Are Central Banks Moving Away from the US Dollar?

The international monetary landscape is undergoing a profound transformation as central banks worldwide reassess their reserve strategies. According to the Official Monetary and Financial Institutions Forum (OMFIF) survey conducted between March and May 2025, reserve managers overseeing approximately $5 trillion in assets are actively planning significant portfolio adjustments—with the US dollar experiencing an unprecedented decline in preference.

The Shifting Landscape of Global Reserve Assets

Perhaps most telling is the dollar's dramatic fall from grace in central bank preference rankings. Once consistently top-ranked, the greenback has plummeted to seventh place in just one year—a startling indicator of changing sentiment among the world's monetary authorities.

The numbers paint a clear picture: 70% of surveyed central banks now cite the American political landscape as a deterrent to dollar investments, more than double the percentage from the previous year. This represents an extraordinary shift in institutional confidence that extends beyond typical market fluctuations.

"As far as I remember, this question has never been asked before, not even after the great financial crisis in 2008," notes Max Castelli of UBS Asset Management, regarding the unprecedented questioning of the dollar's safe-haven status.

Key Factors Driving De-Dollarization

Several interconnected factors are accelerating this reserve diversification trend:

• Geopolitical fragmentation: The splintering of global trade networks into regional blocs has prompted reserve managers to seek currency exposure aligned with their economic partnerships.

• Market volatility: President Trump's April 2025 "Liberation Day" US economy tariffs triggered significant tariff-induced market turbulence, sending shockwaves through currency and bond markets. The subsequent decline in safe-haven dollar assets demonstrated the vulnerability of dollar-denominated holdings to unilateral policy decisions.

• Financial autonomy: Central banks increasingly prioritize independence from any single currency system that could be weaponized through sanctions or policy shifts.

• Yield considerations: Interest rate differentials between the dollar and alternative currencies have narrowed, reducing the opportunity cost of diversification.

This multifaceted de-dollarization movement marks a fundamental reassessment of the post-Bretton Woods monetary system that has underpinned global finance for decades.

How Is Gold Becoming the New Safe Haven for Central Banks?

Against this backdrop of currency uncertainty, gold has emerged as a primary beneficiary of the shifting reserve landscape. Central banks are accelerating their already record-setting pace of precious metal acquisitions, seeking tangible assets detached from national monetary systems.

Record-Breaking Gold Accumulation Trends

The OMFIF survey reveals that one-third of central banks plan to increase their gold holdings over the next 1-2 years—the highest level of intended gold accumulation in at least five years. This trend appears set to continue, with 40% of central banks planning to increase gold allocations over the next decade.

These intentions build upon an existing momentum. Between 2022 and 2024, central banks collectively purchased over 1,000 tonnes of gold annually, establishing new historical records for official sector demand. This sustained buying pressure has provided significant support for all-time gold high analysis despite periods of dollar strength.

Why Gold Appeals to Reserve Managers

Central banks' growing appetite for gold stems from several strategic advantages:

• Political neutrality: Unlike currencies, gold isn't directly tied to any particular government or policy regime, offering insulation from geopolitical tensions amid conflict.

• Inflation protection: Gold has historically maintained purchasing power during currency devaluation episodes, serving as an effective hedge against inflation.

• Crisis resilience: During periods of market turbulence, gold has demonstrated relative stability compared to financial assets.

• Portfolio diversification: Gold typically exhibits low correlation with other reserve assets, enhancing overall portfolio stability.

• Tangible asset security: Physical gold provides security independent of digital financial systems, offering protection against cyber vulnerabilities.

This convergence of factors has repositioned gold from a legacy holding to an actively managed strategic asset in central bank portfolios.

Which Currencies Are Gaining Ground Against the Dollar?

As central banks reduce dollar exposure, two currencies are positioned to capture significant portions of reallocated reserves: the euro and the Chinese yuan.

The Euro's Resurgence Opportunity

The OMFIF survey identifies the euro as the most in-demand currency for near-term reserve increases. A net 16% of central banks plan to boost euro holdings over the next 12-24 months—more than double the previous year's figure of 7%.

This renewed interest suggests the euro could recapture its pre-2011 debt crisis share of global reserves (approximately 25%, compared to its current 20%) within this decade. According to Bernard Altschuler of HSBC, "It's realistic for the euro to reach 25% of global reserves within 2-3 years if Europe addresses its bond market fragmentation issues."

Factors Supporting Euro Adoption

The euro's potential ascendancy is supported by several structural advantages:

• Economic scale: The European Union represents the world's largest trading bloc with approximately $18 trillion in combined GDP.

• Institutional stability: The European Central Bank has demonstrated policy consistency and inflation-fighting credibility.

• Capital market integration: Ongoing efforts to strengthen and unify European financial markets have improved euro-denominated asset liquidity.

• Sovereign bond expansion: European nations are increasing debt issuance, though still well below the $29 trillion US Treasury market.

The Yuan's Long-Term Prospects

While the euro leads in short-term demand, the Chinese yuan shows stronger long-term potential. The OMFIF survey indicates 30% of central banks plan to increase yuan holdings over the next decade—nearly double the euro's long-term intention rate.

This long-term optimism suggests the yuan's share of global reserves could triple to approximately 6% by 2035, reflecting China's growing economic influence and financial internationalization efforts.

Challenges for Yuan Internationalization

Despite its progress, the yuan faces significant hurdles:

• Capital controls: Restrictions on currency flows continue to limit the yuan's international appeal and convertibility.

• Financial market access: China's bond markets, while substantial at $21 trillion, remain relatively less accessible to foreign investors compared to dollar and euro markets.

• Political considerations: Governance concerns and US‑China trade war impact may deter some reserve managers from significant yuan allocations.

These challenges explain the divergence between short-term caution and long-term optimism regarding yuan adoption in reserve portfolios.

What Will the Reserve Currency Landscape Look Like in 2035?

Financial authorities and economists are closely monitoring the evolving reserve landscape and offering insights into future currency distributions, with notable consensus emerging around several key projections.

Projected Reserve Currency Shares by 2035

Based on the OMFIF survey and expert assessments, the reserve currency landscape in 2035 is expected to feature:

• US Dollar: Remaining the dominant reserve currency but declining from the current 58% to approximately 52%

• Euro: Increasing from 20% to around 22-25% of global reserves

• Chinese Yuan: Tripling its share to approximately 6%

• Gold: Continuing its upward trajectory as a non-currency reserve asset

• Other currencies: Collectively gaining marginal share, with particular strength in regional trade blocs

These projections reflect a gradual rather than revolutionary transition, with the dollar maintaining primacy while experiencing steady erosion of its dominance.

Expert Perspectives on Currency Shifts

Harvard professor and former IMF chief economist Kenneth Rogoff offers a particularly insightful assessment: "The euro's share of global reserves will almost surely rise over the next few years, not so much because Europe is viewed so much more favorably, but because the dollar's status is diminished."

This nuanced view highlights how currency preferences often reflect relative rather than absolute assessments. The euro's gains may stem more from dollar avoidance than enthusiastic euro adoption—a distinction with important implications for European policymakers seeking to strengthen the euro's international role.

Former European Central Bank official Francesco Papadia echoes this sentiment, noting that Europe's opportunity stems from structural shifts in reserve management philosophy rather than inherent euro strength.

How Can Europe Capitalize on Dollar Diversification?

Several structural developments could potentially accelerate the euro's adoption as a major reserve currency alternative, provided European policymakers implement necessary reforms.

Key European Initiatives Supporting the Euro

To capitalize on central banks' diversification appetite, European authorities are pursuing several initiatives:

• Expanded Bond Markets: Increasing the availability of euro-denominated sovereign bonds to compete with the $29 trillion US Treasury market remains a priority. The limited supply of AAA-rated euro bonds has historically constrained the currency's reserve appeal.

• Defense Spending: European commitment to greater self-sufficiency through increased defense expenditures signals both fiscal capacity and strategic autonomy—factors that enhance currency credibility.

• Joint EU Borrowing: The potential expansion of collective debt issuance, building on pandemic-era recovery programs, could create deeper euro-denominated bond markets with enhanced liquidity.

• Capital Market Integration: Renewed efforts to unify fragmented European financial systems would improve transaction efficiency and asset liquidity—critical factors for reserve currency status.

Germany's Investment Appeal

The OMFIF survey indicates that public pension funds and sovereign wealth funds increasingly view Germany as the most attractive developed market for investment allocations. This preference aligns with central bank reserve strategies and suggests broader institutional confidence in European financial assets.

Germany's combination of industrial strength, export orientation, and fiscal discipline positions it as Europe's economic anchor—a role that enhances the euro's credibility as the region's unified currency.

What Does This Mean for Gold Markets and Investors?

The rebalancing of central bank reserves has significant implications for gold markets and investment strategies, creating both opportunities and challenges across the financial landscape.

Market Impact of Central Bank Gold Demand

Central banks' sustained gold purchases provide important structural support for the gold market:

• Price support: Continued official sector demand creates a reliable buyer base that can absorb market volatility.

• Physical market tightness: Large-scale central bank acquisitions may contribute to physical gold scarcity, potentially widening the spread between paper and physical gold prices.

• Psychological signaling: Reserve diversification validates gold's monetary role, potentially influencing private investor sentiment.

• Reduced selling pressure: Unlike the 1990s-2000s when central banks were net sellers, today's environment removes a historical source of market pressure.

These dynamics suggest a supportive environment for gold prices, particularly during periods of currency or geopolitical uncertainty.

Investment Strategy Considerations

For investors navigating this shifting monetary landscape, several strategic approaches warrant consideration:

• Portfolio allocation: The same diversification logic driving central bank decisions applies to private portfolios, suggesting moderate gold exposure as a stabilizing element.

• Currency exposure management: Reducing concentrated dollar positions in favor of a more balanced currency mix aligns with institutional trends.

• Regional investment focus: European financial assets may benefit from increased reserve manager demand, particularly in core economies like Germany.

• Market timing awareness: Major central bank policy announcements or reserve composition disclosures may trigger short-term market movements.

These considerations highlight the importance of understanding central bank behavior as a fundamental driver of both currency and precious metals markets.

FAQ: Understanding Central Bank De-Dollarization

How quickly could the dollar's share of global reserves decline?

While reserve composition changes typically occur gradually, geopolitical shocks and policy shifts can accelerate transitions. Most experts project a steady rather than precipitous decline in dollar reserves over the coming decade, with the OMFIF survey suggesting approximately a 6 percentage point reduction (from 58% to 52%) by 2035.

Historical precedents suggest major reserve shifts often require 15-20 years to fully materialize, barring extraordinary circumstances. The British pound's transition from dominant reserve currency to minor component occurred over several decades rather than years.

Are central banks completely abandoning the dollar?

No, central banks are diversifying rather than abandoning dollar holdings. The dollar is expected to remain the largest single reserve currency for the foreseeable future, though with a reduced share of total reserves.

This nuanced approach reflects practical constraints including the dollar's continued dominance in trade settlement, debt issuance, and financial markets. Even central banks actively pursuing diversification typically maintain substantial dollar allocations, adjusting proportions rather than eliminating exposure.

Which countries are leading gold accumulation efforts?

While the OMFIF survey doesn't identify specific countries, previous reports have highlighted significant gold purchases by China, Russia, Turkey, and various emerging market central banks seeking to reduce dollar dependency.

This pattern suggests that nations with geopolitical tensions with the United States or aspirations for greater monetary autonomy lead gold accumulation efforts. However, even traditional US allies including European nations have maintained or increased gold reserves in recent years, indicating broader diversification motives.

Could digital currencies impact reserve composition?

Central bank digital currencies (CBDCs) and potentially private digital assets may eventually influence reserve management, but traditional currencies and gold remain the primary focus of current diversification efforts.

The development of digital yuan and digital euro projects could potentially accelerate their respective currencies' international adoption by improving settlement efficiency and reducing transaction costs. However, these innovations remain secondary to fundamental questions of economic scale, financial market depth, and institutional credibility in reserve currency decisions.

What would accelerate or reverse these trends?

Factors that could accelerate de-dollarization include further US policy uncertainty, trade tensions, and sanctions policies. Conversely, renewed US economic outperformance, political stability, and deeper capital markets in competing currencies could slow or reverse these trends.

The interdependence of these factors creates a complex and dynamic environment for reserve managers. While structural forces favor gradual diversification, cyclical economic and political developments may create countertrends that temporarily reinforce dollar dominance during specific periods.

Central banks will likely continue calibrating their approach based on both long-term strategic considerations and short-term market conditions, resulting in an evolving rather than revolutionary transformation of the global reserve landscape.

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