More central banks are abandoning the US dollar

Author: Olga Samofalova

A survey of 75 central banks shows that they are considering adjusting their capital flows, abandoning the US dollar and turning to gold, the euro, and the Chinese yuan. This trend began a decade ago in Russia, followed by countries such as China. However, the process of de-dollarizing foreign exchange reserves is still accelerating - why are more countries losing trust in the US dollar?

A survey of 75 central banks from March to May this year showed that the tariff policy introduced by US President Donald Trump on April 2nd "Liberation Day" has had an impact on the reserve policies of various countries. The trade war triggered market turbulence, causing the price of the US dollar and US Treasury bonds to fall, prompting central banks holding $3 trillion in foreign exchange reserves to re-plan their capital flows, abandoning the US dollar and turning to gold, the euro, and the Chinese yuan. This information was disclosed by the Official Monetary and Financial Institutions Forum (OMFIF).

OMFIF data shows that up to 40% of central banks plan to increase their gold reserves in the next ten years. The US dollar, which once dominated, has now dropped to seventh place. At the same time, 70% of the surveyed central banks said that the political environment in the United States has made them reluctant to invest in the US dollar, a proportion that has more than doubled compared to last year.

In the currencies that have replaced the US dollar, the euro and the Chinese yuan have benefited the most. According to OMFIF's survey, 16% of central banks plan to increase their euro reserves in the next 12-24 months, making the euro the top demand with its share rising from 7% last year to the first position. The Chinese yuan follows closely, and in the next ten years, it will become a more favored currency: 30% of central banks expect to increase their yuan reserves, and its share in global foreign exchange reserves will rise to 6%, tripling from the current level.

Data from the IMF blog shows that the share of the US dollar in global foreign exchange reserves has been continuously declining over the past 25 years, falling from over 70% in 1999 to 57.3% in 2023, a historic low.

Alexander Potapov, analyst at the Russian "Finam" group, pointed out: "In recent years, most central banks in developing countries have turned their attention to gold. By the end of 2024, the share of gold reserves has reached 20%, surpassing the euro to become the second largest reserve asset. Its growth comes from record gold purchases (over 1,000 tons per year since 2022) and a doubling of gold prices, while the share of the US dollar has continued to decline to 46%."

The "originator" of this trend is Russia - after the Western (led by the United States) froze Russian foreign exchange reserves, the process of de-dollarization accelerated due to the US-led trade war and the continuously rising U.S. debt levels.

Professor Mikhail Gordinov from the Department of Financial Sustainability at Plekhanov Russian University of Economics stated: "Russia indeed initiated the de-dollarization process in 2014, prioritizing the Chinese yuan, because after suffering the most sanctions in history, China was one of the main trading partners. But the Chinese yuan is not the only option; currencies of other friendly countries are also being used."

"Between 2018 and 2020, the Russian Central Bank significantly reduced the share of the US dollar in international reserves, while increasing gold and Chinese yuan reserves. Under the background of rising gold prices, this strategy proved effective: the share of gold reserves reached 25%, bringing considerable revaluation gains in terms of market value. Even under the pressure of sanctions, Russia maintained the stability of its reserves," said Vladimir Chernov, analyst at Freedom Finance Global.

Experts are confident that the trend of de-dollarization will continue to accelerate. Mikhail Gordinov pointed out: "The actions taken by some African countries to restore sovereignty have stimulated their central banks' demand for gold. The Chinese Central Bank made record gold purchases last year, both through official channels and market participants. In addition, nearly one-third of central banks around the world plan to purchase more gold - all these indicate that the international payment system is facing a crisis, and countries are seeking safe havens in case the existing monetary system collapses."

Chernov said: "I think the reasons behind this go beyond political risks, sanctions, and the precedent of freezing Russian foreign exchange reserves. They also involve the increasingly important role of Southeast Asia and China in the global economy, changes in trade currency corridors, and the loss of trust in the US dollar as a 'neutral reserve asset'. This is not the collapse of the US dollar, but a slow yet systematic shift towards a multipolar system."

At the same time, the US dollar exchange rate has continued to weaken in the first half of 2025: the dollar index (DXY, against six major currencies) fell by 4.6% in the first quarter, and the decline widened to 5.3% in the second quarter, reaching the lowest level since the spring of 2022 by the end of June. Potapov explained: "However, the current weakness of the US dollar does not pose a fatal risk. Over the past 70 years, the US dollar often depreciated during the presidency of Republican presidents - research shows that Republican governments usually start with a strong US dollar, then depreciate it during their term. For example, Trump was determined to push for a weaker US dollar during his first term, and he seems to be repeating this scenario at the beginning of his second term. On the contrary, Democratic presidents usually start with a weak US dollar, then see it appreciate."

According to his prediction, the US dollar will depreciate another 3% against global currencies in the third quarter.

What else do countries' central banks dislike about the US dollar?

Chernov pointed out: "The core reason lies in the politicization of the US dollar, increased risk of sanctions, high volatility, and the uncertainty of US economic policies - 70% of central banks mentioned in the OMFIF survey that the political environment in the United States is the main reason for abandoning US dollar investments. The alternatives depend on trade flows: Asian countries prefer the Chinese yuan as the first settlement currency, while the West tends to favor the safer and more neutral euro, and gold is a universally accepted 'de-politicized' asset."

Looking at gold, its price has continued to surge and set new records. Mikhail Gordinov mentioned: "Gold is almost unaffected by sanctions, but physical transactions are inconvenient. Therefore, some financial market institutions have launched various digital derivatives, which can avoid the risk of physical transportation and simplify the settlement process."

There are also risks in switching to the euro and the Chinese yuan. Gordinov added: "Although the euro has a liquidity bond market of nearly 1.1 trillion euros, the EU faces significant political (and thus economic and financial) fragmentation risks; the Chinese yuan has the risk of strong control by the Chinese government over the currency, but the expanding trade relationship between China and the global economy provides support for the yuan."

Chernov analyzed: "In the next decade, the global reserve structure will become more balanced. The share of the Chinese yuan may rise to 6% (a threefold increase), gold remains a key safe-haven asset, and the share of the US dollar will continue to fall to around 50%. This will reduce the dependence of developing countries on the risks of the US dollar, strengthen the role of regional currencies, and promote the development of cross-border local currency settlements. The world is gradually moving from 'unipolar dominance of the US dollar' to 'financial multipolarity'."

Mikhail Gordinov summarized: "The global monetary system has actually entered a multipolar phase. Currently, it is necessary to improve and reform various payment mechanisms and tools - this process is already underway. In this system, gold is a universal 'hard asset' that ensures national wealth security; if the EU structure can be maintained in the coming years, the euro will continue to circulate within the region, but it faces the risk of 'centrifugal' protests caused by the differences in living standards between the east and west; the Chinese yuan is the core currency for Southeast Asian and neighboring countries."

Original: https://www.toutiao.com/article/7519834284979520041/

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