Central Banks Turn Bearish on Dollar for First Time, Survey Shows

A survey from the Official Monetary and Financial Institutions Forum (OMFIF) released Tuesday found that more central banks now plan to reduce their dollar holdings than increase them over the coming decade. It is the first time in the survey's 10-year history that the balance has tipped toward cutting dollar exposure.

The shift reflects rising political risks tied to the U.S. currency, the OMFIF report said. Central banks cited concerns about fiscal trajectories and the dollar's role in sanctions, though the survey did not break out specific triggers. About two-thirds of the respondents were central banks and sovereign wealth funds.

Dollar allocations have already been edging lower for years. The currency's share of global foreign exchange reserves fell to 58% in the fourth quarter of 2023, down from about 60% a year earlier and more than 70% in 2000. The OMFIF data suggests that drift could accelerate.

A sustained reduction in official dollar demand carries implications for financial markets. Lower buying from central banks tends to reduce demand for U.S. Treasuries, the most liquid asset the world holds. Over time, that can push Treasury yields higher than they would be otherwise, even if the effect is gradual. It also removes a source of stability in times of stress – central banks tend to buy dollars when markets fall.