For the first time ever, a survey by the Official Monetary and Financial Institutions Forum (OMFIF) indicates that more central banks globally are planning to reduce their dollar holdings than to increase them over the next ten years. This shift away from the dollar is attributed to increasing political risks linked to the U.S. currency and broader U.S. policy uncertainty, alongside heightened geopolitical risks. The findings align with a growing debate about the U.S. dollar's role as the primary global reserve currency.
The global monetary system is perceived to be transitioning towards a "multipolar" world, a belief held by 79% of central banks and 60% of public funds. Despite these long-term intentions to reduce dollar holdings, the dollar has rallied 3% this year, fueled by higher U.S. interest rates, demand for U.S. assets, and a "flight to safety" sparked by the U.S.-Iran war. However, structural challenges are preventing the euro and Chinese renminbi from emerging as clear alternatives, although nearly all respondents view the yuan as effective for portfolio diversification. Separately, 74% of central banks expect the US dollar's share of global reserves to decline over the next five years, according to a World Gold Council survey.
Gold is emerging as a central asset in reserve management strategies, with 82% of central banks holding it and a net 30% planning to increase their gold allocations over the next one to two years. The World Gold Council also reported that 84% of participating central banks expect gold to account for a higher share of total national reserves over the next five years. Other currencies like the Norwegian crown, New Zealand dollar, and sterling are also gaining interest as central banks seek to diversify. Emerging markets are also seeing increased interest, with 38% of global public funds planning to increase allocation to these economies, up from 27% last year. In contrast, interest in developed economies fell to 25% from 47%.
The survey, which included 90 central banks, public pension funds, and sovereign funds overseeing approximately $10 trillion in assets, also highlighted a significant increase in the adoption of artificial intelligence (AI). More than 66% of central banks plan to increase AI integration in the near term, with 89% of central banks in developed economies already using AI, compared to 44% in emerging markets. AI is primarily being used for data analysis and back-office functions. The U.S. and China were identified as the most attractive markets, partly due to their roles in the AI boom. Over 60% of public funds plan to increase allocations to physical assets like infrastructure and real estate in the next one to two years.
