Global pace of "de-dollarization" accelerating? OMFIF survey: 70% of central banks unwilling to hold US dollars, gold, euros, and renminbi expected to benefit

Managers of trillions of dollars in reserves managed by major central banks worldwide are considering shifting funds from the US dollar to gold, the euro, and the Chinese yuan. The trend is emerging as the split in global trade and geopolitical turmoil prompt a reevaluation of capital flow strategies. According to a report to be released later by the Official Monetary and Financial Institutions Forum (OMFIF), one-third of central banks managing a total of $5 trillion in assets plan to increase their investments in gold in the next one to two years. Excluding central banks planning to decrease investments, this proportion has reached the highest level in at least five years. A survey of 75 central banks conducted between March and May also for the first time revealed the impact of President Trump's "Liberation Day" tariff policy on April 2, which caused market turmoil and led to a drop in the safe-haven currency US dollar and US Treasury prices. Central banks worldwide have been increasing their gold holdings at a record pace, and the survey shows that gold is expected to further benefit in the longer term, with 40% of central banks planning to increase their gold holdings in the next ten years. OMFIF stated, "After years of record central bank gold purchases, reserve managers are stepping up their allocation to this precious metal." Last year's most favored currency in the survey has now dropped to the seventh spot; 70% of respondents expressed hesitation in investing in the US dollar due to the US political environment, more than double from last year. In terms of currencies, the euro and the yuan are expected to benefit the most from the reduced reliance on the US dollar. Among the central banks surveyed by OMFIF, 16% indicated plans to increase their euro holdings in the next 12 to 24 months, making it the most favored currency, higher than 7% a year ago, followed by the yuan. However, the yuan has received more favor over the next decade, with 30% of central banks indicating an increase in yuan holdings, with its share in global reserves expected to double to 6%. Additionally, three sources directly dealing with reserve management institutions revealed to Reuters that the euro is now expected to reclaim the share of currency reserves lost due to the Eurozone debt crisis in 2011 by the end of this decade. They stated that after "Liberation Day," reserve management institutions have become more positive about the euro. This means that the euro's share in global currency reserves will rise to around 25%, up from the current 20%, marking a critical moment in the Eurozone's recovery from the debt crisis that once threatened the euro's existence. Max Castelli, Global Sovereign Market Strategist and Consultant at UBS Asset Management, told the media that reserve management institutions have been questioning the safety of the US dollar's status as a safe haven since "Liberation Day." Castelli said, "As far as I know, this issue has never been raised before, even after the 2008 financial crisis." The OMFIF survey shows that by 2035, the average share of the US dollar in global foreign exchange reserves is expected to be 52%, maintaining its position as the top reserve currency, but down from the current 58%. Is it the euro's time to shine? Respondents to the OMFIF survey expect the euro's share in global reserves to reach about 22% in ten years. Kenneth Rogoff, Professor at Harvard University and former Chief Economist of the International Monetary Fund, said, "In the coming years, the euro's share in global currency reserves will almost certainly rise. This is not because Europe's international image has improved significantly, but because the dollar's position has declined." Sources familiar with foreign exchange reserve managers directly communicated that if Europe could increase its bond reserve size (currently much lower than the $29 trillion size of the US Treasury market) and integrate its capital markets, Europe's share of attracting foreign exchange reserves could increase more quickly. ECB President Lagarde has also called for action to strengthen the feasibility of the euro as an alternative to the dollar. Bernard Altschuler, Director of Global Central Bank Research at HSBC, said, "The euro is currently the only real alternative currency that can effectively replace the dollar and significantly change the size of foreign exchange reserves." He added that if these issues are addressed, he believes that the euro reaching a 25% share in global reserves within 2-3 years is "feasible." The EU is the world's largest trade group, with an economy much larger than its other competitors to the US dollar. Capital controls limit the attractiveness of the Chinese yuan. The momentum for change is accelerating, with Europe indicating a willingness to reduce its reliance on the US by increasing defense spending (including through more EU joint borrowing). Germany is increasing spending, and the EU is working to relaunch efforts to integrate its capital markets. The OMFIF also surveyed public pension funds and sovereign wealth funds, showing that Germany is the most attractive developed market. Castelli of UBS Asset Management stated that he has received numerous inquiries about the euro, estimating that by the late 2020s, the euro's share in reserve currencies may rise back to 25%. The most optimistic view suggests that Francesco Papadia, Senior Research Fellow at Bruegel Think Tank and former manager of European Central Bank market operations during the debt crisis, estimates that the euro could regain a 25% share in just two years; he has been in communication with reserve management institutions from various countries who are more willing than ever to focus on the euro.