Central banks are ditching the greenback: What’s in favour instead?

[SINGAPORE] Central banks hold a variety of assets, each serving a specific purpose tied to their mandate of maintaining monetary and financial stability.

Beyond mandate, a central bank’s holdings are also influenced by its policy frameworks and economic conditions.

Historically, the US dollar, sovereign bonds and gold are the cornerstones of many portfolios.

But with market turmoil sparked by US President Donald Trump’s tariff moves, the currency hit a 50-year low in the first half of 2025, tumbling by 10.7 per cent.

These days, central banks are moving away from the greenback, according to a survey of 75 central banks conducted by the Official Monetary and Financial Institutions Forum (OMFIF) between March and May.

The US dollar was knocked off the most popular pedestal last year to seventh place this year, according to the OMFIF survey.

The Business Times goes back to basics, and throws some light on how central banks weigh their options.

What types of assets do central banks traditionally hold?

The key types of assets held by central banks include:

Allocating a weight to each asset

The composition of what each central bank holds reflects its unique priorities – whether it’s exchange rate stability, inflation targeting, or crisis response readiness.

“Some central banks may hold a larger portion in foreign exchange reserves to manage currency volatility, while others may favour gold for its role as a safe haven asset,” said Dan Chang, trading representative at PhillipCapital, in an interview with BT. 

Let’s take the US Federal Reserve as an example. The primary assets on its balance sheet are:

• US Treasury securities: used for open market operations to influence interest rates and manage liquidity.

• Mortgage-backed securities: added post-2008 to support the housing market and credit flow.

• During crises, the Fed may also hold corporate bonds or other assets under emergency programmes to stabilise markets.

But for the Monetary Authority of Singapore (MAS), it is different due to the Republic’s exchange rate-based monetary policy framework: 

• Since 1981, MAS has conducted monetary policy by managing the Singapore dollar exchange rate. It does not control domestic interest rates or money supply growth. Exchange rate policy is the only form of monetary policy in Singapore.

• It holds a significant portion of its assets in foreign reserves, which are actively managed and diversified to ensure Singapore dollar stability.

• Does not hold Singapore Government Securities the way other central banks hold their own bonds.

Why central banks are shying away from the US dollar

These are the structural factors behind this phenomenon:

• Economic sanctions

• Growing importance of emerging markets,

• Increased recognition of how over-reliance on a single currency exposes countries to financial and geopolitical risks,

• Rise of China as a trading powerhouse, and

• Diversification of forex reserves

This steady but persistent weakening of the currency – in terms of its standing and central bank holdings of dollar-denominated assets – has been occurring for years, clarified Luca Paolini, chief strategist at Pictet Asset Management.

“Sanctions, asset freezes and US threats to suspend global economies from the Swift payment systems have made (US dollar) reserves much less safe than in the past,” he explained. Countries facing extensive US sanctions are prompted to conduct trade in non-US currencies.

Naturally, the hiking of US tariffs in recent times has further eroded the status of the US dollar, and reinforces a greater need for de-dollarisation.

What assets and currencies are on the rise now, and why

The draw of foreign currencies, however, is more of a push factor away from the US dollar than a pull factor of other assets, in Chang’s view, due to heightened geopolitical tensions and uncertainties with US President Donald Trump in power.

“It is ultimately about building a more balanced and resilient portfolio of currencies and assets to weather an increasingly complex global landscape,” he said.

For gold, data released by World Gold Council (WGC) on Jun 17 reflected that among the 73 central banks polled, some 95 per cent of them indicated that they expect to continue increasing their gold holdings in the next one-year period.

This is a record high since the data was first tracked in 2019, and a 17 per cent increase from last year’s survey results.

“Central banks are concerned about interest rates, inflation and instability – all reasons to turn to gold to mitigate risk,” said Fan Shaokai, global head of central banks and head of Asia-Pacific (ex-China) at WGC.

China’s keen interest in gold

China is an important player in the gold market. As at March, its official gold reserves reached 2,292 tonnes, accounting for 6.5 per cent of its total reserves.

“That rise reflects continuous buying, and this build-up isn’t just symbolic, in my opinion,” said Chang. “It’s strategic.” The country’s growing gold reserves support its broader goal of strengthening the renminbi’s credibility and international standing.

It also offers China a refuge from US dollar-centric risks such as sanctions, and supports the broader de-dollarisation push.

“By bolstering gold holdings, China signals to global markets that it is prepared for a more multipolar monetary system,” Chang added.

Pros and cons of gold

As a reserve asset, gold has some disadvantages.

“It is not a widely accepted means of payment – especially not in bullion form – and carries storage and refining costs. This is in addition to how it does not pay interest or offer other income streams,” Stephen Dover, chief market strategist and head of the Franklin Templeton Institute, said.

“Gold tends to lose its real purchasing power in the long run, meaning gold prices do not keep pace with inflation over a longer period of time.”

Dover explained that gold can be thought of as a form of “portfolio insurance”, with the “premiums” reflected in opportunity costs of not investing in interest-bearing instruments and by offering negative real returns.

That said, gold ETFs, compared to physical gold, are seen as cost-effective with lower storage and insurance costs, and come with minimal tracking error, which means they closely mirror the actual price of gold.