Dollar Dominance Erodes as Geopolitics Shift

The US dollar's dominance in global trade and finance is under scrutiny due to recent geopolitical shifts. Its position as the world's primary reserve currency and most widely used unit of account for trade, funding, and cross-border transactions is being challenged.

De-dollarization refers to a sustained decline in the use of the dollar in global trade and financial transactions. It's distinct from the cyclical performance of the greenback, which is driven by factors like interest rate changes, risk sentiment, and growth differentials.

The erosion of confidence in the US and the rise of credible alternatives are two main factors that could threaten the dollar's status. Increased domestic polarization could jeopardize US governance, while positive developments outside the US could boost the credibility of competing currencies.

Foreign central banks and governments are gradually moving away from US Treasurys (USTs) in a bid to diversify their FX reserves. The share of gold in FX reserves has increased, with 45% of central banks expecting their own gold reserves to increase over the next 12 months.