Central Banks Reduce Dollar Holdings to Hedge Geopolitical Risk

Central banks globally are accelerating a shift away from the US dollar to protect against geopolitical risks and international monetary instability. According to a survey by the Official Monetary and Financial Institutions Forum (OMFIF), more central banks now plan to reduce their US dollar holdings than increase them over the next decade for the first time since 2023. This trend is driven by unpredictable US foreign policy, tariff plans under Donald Trump, and conflicts in the Middle East.

Diversification efforts have centered on gold, the euro, and the Chinese renminbi. Gold holdings have increased significantly, with 82% of central banks now holding physical gold compared to 71% last year. Approximately 51% of respondents cited protection against geopolitical risk as a primary driver for these investments. Despite this strategic demand, spot gold prices recently dipped to around $4,008.94 per ounce as markets anticipate the United States Federal Reserve may maintain high interest rates to fight inflation.

While the US dollar still commands roughly 58% of total allocations, the OMFIF report notes that neither the euro nor the renminbi yet provides a complete alternative for reserve managers. Separately, the survey found a widening gap in technology adoption, with 89% of developed economies implementing artificial intelligence in central banking compared to 44% in emerging markets.