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Central Banks Shift Away from Dollar

Euro and gold gain favor amid concerns over U.S. policies

Global central banks are diversifying their reserve assets, reducing reliance on the U.S. dollar in favor of the euro, yuan, and gold. This trend, evident for a decade, has accelerated recently as faith in the dollar weakens.

De-Dollarization Factors

A survey conducted by OMFIF (Official Monetary and Financial Institutions Forum) between March and May indicates that **President Donald Trump’s** trade policies are a primary driver of this shift away from the dollar. These policies have created uncertainty around the dollar and U.S. securities.

Central banks managing trillions in reserves are increasingly turning to the euro, demonstrating resilience against the currency’s historical critics. OMFIF’s research highlights a planned 16% net increase in euro reserves over the next 12–24 months.

Following the euro, the Chinese yuan is also gaining traction. Approximately 30% of central banks intend to increase their yuan holdings, projecting its share to reach 6% within the next decade.

Additionally, 40% of central banks are planning to increase their gold reserves over the next decade, seeking a safe haven amid global economic uncertainties.

The dollar’s popularity has plummeted, falling to seventh place this year after being the most favored currency last year. A significant 70% of respondents cited the political climate in the United States, especially trade conflicts, as a deterrent to dollar investments.

Euro Surges

Fueling this shift, the euro has been gaining strength in currency markets. On July 1st, it hit $1.18 against the dollar, its highest level since July 2021. As of November 2023, the euro area’s trade balance recorded a surplus of 27.9 billion euros, compared to a deficit the previous year, suggesting improved competitiveness (Eurostat).

The European Central Bank (ECB) is closely monitoring the euro’s rapid appreciation, recognizing its potential to negatively impact the competitiveness of euro area countries.

The euro has already risen by approximately 14% against the dollar this year, driven by growing distrust in the U.S. currency. Analysts have noted that the euro is on the verge of its longest winning streak in over 20 years.

While a stronger euro can help suppress inflation and achieve the ECB’s 2% target, continued appreciation could harm exports and push inflation to undesirably low levels.

U.S. Internal Conflicts

Adding to the dollar’s instability, disagreements persist between **President Trump** and Federal Reserve Chairman on interest rate policy.

There is no inflation, a superb economy. Interest should be at least two or three percentage points lower,” said **Trump**.

However, the Fed has resisted pressure from the White House.

So far, we are in a good position to wait to learn more about the probable development of the economy before we consider any correction of our policy,” stated **Jerome Powell** to the Financial Committee of the House of Representatives.