Central Banks Are Moving Away from the US Dollar — What’s Gaining Ground Instead?
Central banks manage a variety of assets to support monetary and financial stability. These holdings are shaped not only by policy mandates but also by broader economic and market conditions.
Traditionally, reserves have centred around the US dollar, sovereign bonds, and gold. However, recent market volatility — notably tied to US President Donald Trump’s tariff decisions — has shaken the dollar’s dominance. In the first half of 2025, the greenback dropped 10.7%, reaching its lowest level in 50 years.
A global survey by the Official Monetary and Financial Institutions Forum (OMFIF) between March and May 2025 found that central banks are increasingly turning away from the dollar. Once the top pick, it fell to seventh place in this year’s rankings.
What Assets Do Central Banks Typically Hold?
Each central bank’s portfolio reflects its strategic priorities, whether those are controlling inflation, stabilising exchange rates, or preparing for crises. For example:
- The US Federal Reserve primarily holds:
- US Treasuries, which are used to regulate interest rates and liquidity
- Mortgage-backed securities, added post-2008 to support credit markets
- Crisis-era instruments like corporate bonds when required
- In contrast, the Monetary Authority of Singapore (MAS), due to its exchange rate-based policy, heavily manages foreign reserves rather than controlling domestic interest rates. Unlike other central banks, MAS does not hold Singapore Government Securities on its balance sheet.
Why Central Banks Are Pulling Back from the Dollar
Several structural shifts are behind the move away from the US dollar:
- The increasing use of economic sanctions
- The emergence of new economic powers, especially China
- A recognition of the risks in over-relying on a single currency
- Rising demand for currency diversification
- Growing scepticism due to US tariffs and threats of financial system exclusion
Luca Paolini, chief strategist at Pictet Asset Management, explained that sanctions and threats to disconnect countries from the SWIFT system have undermined confidence in US dollar reserves. For countries under pressure from Washington, trading in non-dollar currencies is increasingly attractive.
What Are Central Banks Buying Instead?
The shift isn’t necessarily driven by strong pull factors from other currencies, said Dan Chang of PhillipCapital, but rather a response to geopolitical instability. Central banks are looking to diversify and build more balanced, resilient portfolios.
Gold, in particular, is seeing a surge in demand:
- According to the World Gold Council (WGC), 95% of surveyed central banks expect to increase gold holdings over the next year — the highest figure since tracking began in 2019.
- This marks a 17% rise in bullish sentiment compared to 2024.
Fan Shaokai of the WGC explained that high interest rates, inflation, and instability are prompting central banks to lean on gold to manage risk.
China’s Strategic Gold Accumulation
China is playing a leading role in this trend. By March 2025, it had amassed 2,292 tonnes of gold — about 6.5% of its total reserves. Chang noted that this accumulation is more than symbolic; it’s part of a broader effort to enhance the international credibility of the renminbi and shield the country from US-related financial risks.
“Increasing gold holdings sends a clear message — China is preparing for a more multipolar financial system,” Chang said.
Gold: Pros and Cons
Gold isn’t without drawbacks:
- It’s not a widely accepted payment method in raw form
- It incurs storage and refining costs
- It doesn’t generate income like interest-bearing securities
Stephen Dover of Franklin Templeton described gold as “portfolio insurance.” It may protect against volatility, but that protection comes at a cost — namely, opportunity costs and negative real returns over time.
However, gold ETFs are emerging as a cost-effective alternative. They reduce storage and insurance burdens while closely tracking gold prices.
Bottom Line: As confidence in the US dollar wanes, central banks are rebalancing reserves. Gold, foreign currencies, and diversified assets are gaining favour in a world of shifting geopolitics and economic uncertainty.
