Central Banks Shouting 'Strong Dollar'... "Expanding Dollar Assets Instead of Yuan"

30% of 73 Central Banks "Expand Dollar Holdings"
Double-Digit Decline in Yuan Investment Ratio
"Impact of Prolonged US High Interest Rates"

A survey revealed that global central banks are likely to increase their allocation of dollar assets in the short term. In contrast, the proportion of yuan holdings is expected to decrease. The prolonged high interest rates in the U.S. and positive economic outlook are interpreted as factors driving the increased demand for the dollar.

On the 4th (local time), the Official Monetary and Financial Institutions Forum (OMFIF), a UK-based think tank, conducted a survey of 73 central banks managing approximately $5.4 trillion in foreign reserves worldwide. The net percentage of respondents who said they would increase their dollar holdings over the next 1-2 years was 18% (total respondents 30%), three times higher than last year’s 6%. The proportion planning to increase euro holdings followed at 7%. The percentage intending to expand yuan holdings was 2%, a significant drop compared to 30% in 2022 and 12% in 2023.

[Image source=Pixabay]

This contrasts with OMFIF’s 2021 survey, where 30% of respondents expressed intentions to increase yuan investments and 20% planned to reduce dollar holdings. Major foreign media outlets citing the OMFIF survey results stated, "As demand for the yuan among central banks stagnates, their efforts to increase exposure to the Chinese currency over the years have come to a halt."

The reversal in this trend is interpreted as being influenced by the prolonged high interest rate environment in the U.S. In its report, OMFIF noted, "Short-term factors such as the U.S. benchmark interest rate, expected to remain higher than China’s, appear to be driving renewed demand for the dollar among central banks." According to major foreign media, Nikil Sanghvi, Managing Director of OMFIF, pointed out, "The fact that the dollar is currently the most demanded currency among central banks in the short term, while demand for the yuan has stagnated, suggests that a series of assessments supporting the dollar’s decline are no longer valid."

As the strong dollar trend is confirmed among global central banks, attention is focused on whether this will bring changes to the policies of countries preparing systems to replace the dollar’s role as the global reserve currency. Emerging market group BRICS, represented by Brazil, Russia, India, China, and South Africa, saw new members such as Egypt, Iran, and the United Arab Emirates join last year. These countries are reportedly developing financial and payment systems to reduce their dependence on the dollar in their domestic economies and trade with the U.S.

Sanghvi explained, "In the past 1-2 years, the strongest demand for the dollar has come from central banks in Asia and Latin America," adding, "Reserve managers in these banks are most likely to plan to reduce their yuan allocations." However, he added, "Over a 10-year horizon, the dollar’s share of global foreign exchange reserves is expected to decline very gradually." According to the IMF, the dollar currently accounts for 58% of global foreign exchange reserves, while the yuan’s share is 2.3%.

This content was produced with the assistance of AI translation services.