The US dollar has long stood as the cornerstone of global finance, but recent shifts suggest that its dominance may be facing new challenges. Central banks worldwide are exploring diversification strategies, raising questions about the future role of the dollar in international reserves and transactions.
One notable trend is the increasing accumulation of gold by central banks. In 2022, they collectively purchased a record 1,136 tons, followed by 1,037 tons in 2023. This move is seen as a strategy to reduce reliance on the dollar and US Treasuries, freeing up capital for domestic investments. UBS forecasts that central banks will acquire over 990 tons of gold in 2025, underscoring the metal’s role as a hedge against dollar volatility.
Geopolitical factors are also influencing this shift. President Trump’s tariff policies and unpredictable economic strategies have led to increased market volatility. As a result, investors are moving away from US bonds, with the dollar depreciating by over 7% in 2025. European assets, particularly in countries like Italy and Spain, are attracting renewed interest due to their relative stability.
The European Central Bank (ECB) is actively positioning the euro as a viable alternative to the dollar. President Christine Lagarde has emphasized the need for the EU to strengthen its financial infrastructure and capital markets. However, the euro’s share of global reserves remains at approximately 20%, compared to the dollar’s 58%.
Emerging economies are also exploring alternatives. China’s Cross-Border Interbank Payment System (CIPS) and the development of Central Bank Digital Currencies (CBDCs) are part of efforts to create payment networks independent of the dollar. These initiatives aim to reduce exposure to U.S. sanctions and financial policies. Something similar is happening in Brazil’s Central Bank.
Still king
Despite these developments, the dollar’s position remains robust. It is involved in about 90% of all global foreign exchange transactions, and US dollar-denominated assets held in official foreign exchange reserves total between $6.5 and $7 trillion at the end of last year according to IMF estimates.
Analysts caution that while diversification efforts are noteworthy, a complete pivot away from the dollar is unlikely in the near term. Morgan Stanley notes that coordination among BRICS nations on a common currency faces significant economic and geopolitical challenges, and gold, while valuable, is not practical for everyday transactions.
So while central banks are exploring ways to reduce dependence on the US dollar, it continues to play a central role in global finance. The current movements suggest a trend toward diversification rather than a wholesale abandonment of the dollar.
