A new survey involving 75 central banks indicates a reassessment of the US dollar's role in their portfolios. The study, conducted by the independent think tank OMFIF, highlights increasing doubts about the dollar's future.
Waning Strength of the Dollar
According to the report, the euro has emerged as a competitor against the US dollar, while China's currency, the renminbi, is gaining traction in emerging markets. There has been an increase in the proportion of euros and renminbi in central banks' portfolios, fueled by a tendency towards safe-haven assets. A significant 70% of the surveyed central banks view the current US political climate as a deterrent for holding dollar assets, a notable increase from last year's 31%.
Shifting Reserve Currency Status
While the dollar is still viewed as a safe and liquid asset, the majority of central banks expect the dollar's share in global reserves to remain around 50% in the long term. However, these banks envision a gradual diversification of their foreign exchange reserves. In the coming decade, although the dollar is expected to maintain its significance, currencies like the euro and renminbi are likely to gain prominence.
Political and Geopolitical Risks
US political developments, particularly under the Trump administration, have raised questions about the dollar's image as a global safe haven. Concerns about the US financial situation and budget deficit significantly impact central banks' portfolio management. The survey indicates that such concerns about US markets have become more pronounced compared to the previous year. Geopolitical tensions and increased focus on trade protectionism are casting doubt on the dollar’s future role, prompting diversification in reserve currency choices among central banks.
While the US dollar still holds a significant share in global reserves, current geopolitical and economic developments could lead to changes in central banks' reserve management strategies. Most central banks are starting to lean towards different currencies instead of the dollar, influenced by the existing political landscape and economic risks.
