Central Banks Plan to Cut Dollar Reserves as Gold and AI Gain Prominence.
Central banks around the world are planning to reduce their holdings of U.S. dollars over the coming decade for the first time, reflecting growing concerns over geopolitical risks and policy uncertainty surrounding the world’s dominant reserve currency, according to a new survey released on Tuesday.
The findings, published by the Official Monetary and Financial Institutions Forum (OMFIF), mark the first time its annual survey has found that more central banks intend to decrease their dollar allocations than increase them over the next 10 years.
The survey, which gathered responses from 90 central banks, sovereign wealth funds and public pension funds managing a combined $10 trillion in assets, points to a gradual transformation in global reserve management as policymakers prepare for a more fragmented international financial system.
Although the U.S. dollar remains the world’s primary reserve currency and has gained around 3% this year, respondents increasingly cited political uncertainty in the United States and rising geopolitical tensions as reasons to diversify their portfolios.
The shift comes amid broader debate over the future of the global monetary system following heightened international tensions, including the recent U.S.-Iran conflict, and changing global economic dynamics.
OMFIF Senior Economist Yara Aziz said public investors increasingly regard market volatility as a permanent feature rather than a temporary disruption.
“The old assumption that public investors can wait for the environment to normalize looks increasingly unrealistic,” Aziz wrote in the report.
Gold strengthens its role in reserve management
Despite expectations of reduced dollar holdings, the survey found no clear replacement for the U.S. currency.
Instead, reserve managers are gradually expanding holdings across a wider range of currencies while significantly increasing allocations to gold.
Nearly four out of five central banks surveyed, along with 60% of public investment funds, believe the international monetary system is evolving toward a more multipolar structure in which reserve assets become more diversified.
Currencies outside the traditional major reserve group are attracting greater attention.
Respondents reported increasing allocations to the Norwegian krone and the New Zealand dollar, while interest in the British pound also continued to grow.
Central banks also maintained plans to increase holdings of the euro and China’s renminbi, although respondents said structural limitations continue to constrain both currencies from becoming dominant alternatives to the dollar.
Even so, almost all respondents viewed the Chinese yuan as an effective tool for portfolio diversification.
Gold emerged as one of the strongest beneficiaries of changing reserve strategies.
Held by 82% of surveyed central banks, the precious metal has moved to the center of reserve management policies after reaching successive record highs over recent years.
In the next one to two years, gold is expected to see the largest increase in allocations among reserve assets, with a net 30% of respondents planning to expand their holdings.
Analysts say central banks increasingly value gold as a hedge against inflation, geopolitical instability and financial market volatility.
Artificial intelligence reshapes investment strategies
Beyond reserve diversification, the survey highlighted a rapid acceleration in the adoption of artificial intelligence across public financial institutions.
More than two-thirds of central banks said they plan to expand the use of AI in the near future, while none of the advanced economy central banks surveyed indicated they were satisfied with current levels of AI deployment.
Overall, only 9% of central banks said existing AI integration met their needs.
Most institutions currently use artificial intelligence for data analysis, research and administrative functions, although adoption varies significantly between developed and emerging economies.
Nearly 90% of central banks in advanced economies already use AI, compared with just 44% of those in emerging markets.
Almost 60% of public investment funds intend to increase allocations to infrastructure and real estate over the next two years, making them the most popular asset classes outside traditional financial markets.
Source: politicstoday