Central Banks Shift Away from Dollar as Gold, Euro, and Yuan Gain Appeal Amid Geopolitical Upheaval

The custodians of trillions of dollars in global central bank reserves are signaling a significant pivot away from the US dollar, turning instead toward gold, the euro, and China’s yuan. The shift comes in response to the growing fragmentation of global trade and heightened geopolitical tensions, prompting a re-evaluation of financial flows among the world’s monetary authorities.

A new report from the Official Monetary and Financial Institutions Forum (OMFIF) reveals that one in three central banks—managing a combined $5 trillion in reserves—intend to increase their holdings in gold over the next one to two years, after accounting for those planning reductions. This marks the highest net increase recorded in at least five years, underscoring a mounting skepticism toward the greenback's long-standing dominance.

Conducted between March and May, OMFIF’s survey of 75 central banks provides a first detailed glimpse into the aftermath of US President Donald Trump’s April 2 Liberation Day tariffs. These tariffs sparked significant market volatility, causing a decline in the traditionally "safe-haven" dollar and a drop in demand for US Treasuries.

Gold, already being acquired by central banks at unprecedented rates, is poised to benefit further in the long term. According to the report, a net 40 percent of central banks plan to increase gold holdings over the next decade. “After years of record-high central bank gold purchases, reserve managers are doubling down on the precious metal,” OMFIF stated.

In a striking shift, the dollar—which topped OMFIF’s currency preference ranking just last year—plummeted to seventh place in this year’s survey. Seventy percent of respondents cited the US political climate as a deterrent to investing in the dollar, more than double the percentage from a year earlier.

Instead, central banks are increasingly eyeing the euro and the yuan as preferable reserve currencies. A net 16 percent of central banks plan to boost euro holdings within the next 12 to 24 months, making it the most in-demand currency in the short term—up from 7 percent a year ago—followed by China’s yuan.

Looking further ahead, the yuan is expected to see the greatest long-term growth. A net 30 percent of surveyed central banks anticipate increasing their yuan holdings over the next decade, with its share of global reserves projected to triple to 6 percent.

Three sources who work directly with reserve managers told Reuters that sentiment toward the euro has markedly improved since Liberation Day. They believe the euro could reclaim the market share lost during the 2011 eurozone debt crisis, potentially returning to a 25 percent share of global reserves by the end of the decade, up from about 20 percent currently. This would signify a major milestone in the eurozone’s recovery from a crisis that once threatened the currency’s very existence.

Max Castelli, head of global sovereign markets strategy and advice at UBS Asset Management, noted a surge in inquiries following Liberation Day. “As far as I remember, this question has never been asked before, not even after the great financial crisis in 2008,” he said, referring to reserve managers questioning the dollar’s continued status as a safe-haven asset.

According to OMFIF’s findings, the average projection for the dollar’s share of global foreign exchange reserves in 2035 is 52 percent—still the largest share, but down from the current 58 percent.

OMFIF survey respondents also foresee the euro comprising about 22 percent of global reserves by 2035. “The euro’s share of global reserves will almost surely rise over the next few years, not so much because Europe is viewed so much more favourably, but because the dollar’s status is diminished,” said Kenneth Rogoff, Harvard professor and former chief economist at the International Monetary Fund, in an email to Reuters ahead of OMFIF’s publication.

However, the euro’s ascent could be accelerated if the European Union expands its currently limited supply of sovereign bonds—currently dwarfed by the $29 trillion US Treasury market—and completes long-discussed efforts to integrate its capital markets, sources familiar with reserve manager perspectives said.

European Central Bank President Christine Lagarde has repeatedly emphasized the need for stronger action to position the euro as a viable alternative to the dollar. “The euro is the ‘only real alternative currency for the moment to make a significant change in the level of reserves,’” said Bernard Altschuler, global head of central bank coverage at HSBC. He added that it was “realistic” for the euro to hit a 25 percent share of global reserves within two to three years if these structural gaps are addressed.

The EU, already the world’s largest trading bloc, boasts an economy far exceeding the size of the dollar’s other challengers. In contrast, China’s yuan remains constrained by capital controls, limiting its broader reserve currency appeal despite growing interest.

Momentum for diversification is also being driven by strategic shifts in Europe. The EU is signaling a commitment to reduce its reliance on the United States, including through enhanced defense spending and expanded joint EU borrowing. Germany, in particular, is increasing its defense budget, while the bloc intensifies its push to integrate financial markets.

Public pension funds and sovereign wealth funds, also surveyed by OMFIF, now view Germany as the most attractive developed market for investment. UBS’s Castelli confirmed the heightened interest in the euro, stating that he is receiving “many more questions about the euro,” and projected that the currency could reclaim a 25 percent share of reserves by the end of the 2020s.

At the most optimistic end of the spectrum, Francesco Papadia—former head of market operations at the ECB during the eurozone debt crisis—suggested the euro might reach the 25 percent threshold in as little as two years. “Reserve managers he holds discussions with were more willing to look at the euro than before,” said Papadia, now a senior fellow at think tank Bruegel.

Zhou Xiaochuan, who served as China’s central bank governor from 2002 to 2018, echoed these sentiments, agreeing that the euro could play a larger role in global reserves. However, he cautioned that Europe still has “homework to do,” speaking to Reuters on the sidelines of a recent conference.

By fLEXI tEAM