Digital asset managers largely oppose digital assets' implementation
The OMFIF's Global Public Investor series has shed light on the investment strategies of central bank reserve managers, public pension funds, and sovereign funds worldwide. Over the past year, 160 global public investors with over $24tn in total assets have engaged with OMFIF's market-leading reports and events in this series.
Despite discussions and aspirations for alternatives, the US dollar remains the overwhelmingly preferred global reserve currency. Around 58-60% of global reserves are held in dollars as of 2024-2025.
The Persistence of the Euro
The euro, the second most held reserve currency, accounts for roughly 20% of global foreign exchange reserves. The EU's large economic size, robust financial markets, and strong central bank (European Central Bank) make the euro a viable contender. However, the lack of a common fiscal authority and unified European bond market reduces investors’ confidence and limits the euro's attractiveness as a global reserve currency.
The Challenges for the Chinese Renminbi
China aims to internationalize the renminbi as a reserve asset, but its progress is hindered by capital controls, limited financial market depth, and transparency concerns. The renminbi accounts for a small (~2%) but growing fraction of global reserves.
BRICS Currency Proposal: A Current Impossibility
There have been discussions within BRICS countries (Brazil, Russia, India, China, South Africa) about creating a shared currency to reduce reliance on the dollar. However, structural problems such as lack of cohesive monetary policy, strong central banks, and economic divergences make this proposal currently infeasible.
The Role of Digital Currencies
The development of central bank digital currencies (CBDCs) and stablecoins could alter international finance by providing alternatives to traditional banknotes and payment systems. However, cryptocurrencies are currently too volatile and lack sovereign backing to serve as safe global reserves.
Implications for International Finance
The dollar’s supremacy provides the US with lower borrowing costs, significant geopolitical leverage, and a global economic reach. Heavy global reliance on the dollar creates vulnerabilities, such as exposure to US fiscal policy and political volatility, motivating some countries to explore diversification. Geopolitical tensions, economic shifts, and technological innovation are pushing gradual moves toward alternatives and multipolar currency holdings, but no clear replacement is imminent.
A fragmented system could raise transaction costs and financial instability during crises. Despite these challenges, the combination of economic scale, financial market depth, liquidity, trust, and geopolitical power means no viable alternative to the US dollar is poised to displace it as the global reserve currency in the near term. Instead, a gradual diversification within a still dollar-centric system appears most likely.
Additional Insights
Max Castelli and Yara Aziz discuss the global reserve response after 2 April, known as Liberation Day. No central bank surveyed by OMFIF holds any digital assets, and 93% have no intention of doing so. Central banks are turning back to gold, and its role is changing. Reports of the dollar's demise are exaggerated, according to Massimiliano Castelli, head of strategy and advice at UBS Asset Management. Herbert Poenisch, senior research fellow at Zhejiang University, states that discussions about de-dollarisation fall short when it comes to finding a credible replacement for the dollar in cross-border transactions. Aaron Hurd, senior portfolio manager at State Street Investment Management, states that lower returns and higher risk mark a change in dynamics for the US currency. Japan may have an opportunity to gain prominence as de-dollarization accelerates, while Europe is strategically positioned to develop its own safe asset. Cryptocurrencies may accelerate geopolitical shifts, but no specific details are provided.
- The OMFIF's research and events have attracted attention from central bank reserve managers, public pension funds, and sovereign funds worldwide, totaling over $24tn in assets.
- The US dollar is the primary global reserve currency, holding approximately 58-60% of global reserves as of 2024-2025.
- The Euro, as the second most held reserve currency, accounts for around 20% of global foreign exchange reserves, but is hindered by the lack of a common fiscal authority and unified European bond market.
- China's renminbi, accounting for a small (~2%) but growing fraction of global reserves, faces challenges due to capital controls, limited financial market depth, and transparency concerns.
- A shared currency within BRICS countries, proposed to reduce reliance on the dollar, is currently infeasible due to structural issues such as lack of cohesive monetary policy and economic divergences.
- Central bank digital currencies and stablecoins could challenge traditional finance, but their volatility and lack of sovereign backing make them unsuitable as global reserves.
- The dollar's dominance grants the US lower borrowing costs, geopolitical leverage, and a global economic reach, but also creates vulnerabilities that push some countries to explore diversification.
- A gradual diversification towards a still dollar-centric system is more likely, as a clear replacement for the US dollar is not imminent.
- Central banks are re-evaluating their approach to digital assets, with many showing no intention of holding digital assets, while some are turning back to gold, and its role is changing in the context of international finance.
