Dollar Dominance Persists Amid Central Banks' Diversification Efforts

Central banks have long signaled plans to diversify away from the US dollar, but reserve data shows little progress towards that goal. Despite consistent rhetoric and occasional deals settled in local currencies, the dollar's share of global foreign-exchange reserves rose to 57.13% in Q1 2026, up from 56.42% the prior quarter.

This is close to $7.5 trillion in dollar assets, more than five times the equivalent euro holding and nearly thirty times the renminbi's. The rest of the basket undercuts the diversification narrative: the euro held 20.03% of reserves that quarter, while the renminbi's share barely moved, from 1.98% to 1.99%, despite two decades of financial-market opening in Beijing.

The IMF attributed half of Q1 2026's uptick in the dollar's share to dollar appreciation rather than net purchases. The reserve base appears to be drifting away from the dollar, but slowly enough that the direction from one quarter to the next is often ambiguous. Central banks need reserves for intervention, meeting external obligations, and absorbing shocks.

A majority of central banks plan to reduce dollar allocations over the coming decade, citing political risk as the main driver, according to an OMFIF survey. A shift driven mostly by gold's own price rather than central-bank buying has seen gold overtaking Treasuries as a share of official reserves. The honest description is that central banks are trimming dollar concentration at the margin, largely into gold, while still holding the bulk of their reserves in dollars.