A recent study conducted by a renowned asset management firm with $1.5 trillion in assets has shed light on the shifting preferences of central banks. The research indicates that these financial institutions are actively reducing their holdings of the U.S. dollar while showing an inclination towards increasing their exposure to the Chinese yuan. The study attributes this trend to central banks diversifying their currency portfolios due to geopolitical uncertainties and attractive opportunities in emerging markets.
Titled the “2023 Invesco Global Sovereign Asset Management Study,” the report provides valuable insights from 142 chief investment officers, heads of asset classes, and senior portfolio strategists representing 85 sovereign wealth funds and 57 central banks. Collectively, these institutions oversee a staggering $21 trillion in assets as of March 31.
The study highlights several notable observations, including a flight to gold in 2022 amid volatile yields and uncertainties surrounding the future of the U.S. dollar as the world’s reserve currency. Central banks’ increased interest in gold resulted in record purchases, amounting to a net increase in gold holdings for the twelfth consecutive year. Turkish and Chinese central banks accounted for nearly 20% of these acquisitions, while other central banks in the Middle East and emerging markets also displayed a significant interest in gold throughout 2022.
Another aspect explored in the study is the process of de-dollarization. The freezing of Russian assets by Western nations has brought the reliance on the U.S. dollar as the dominant reserve currency into the spotlight, raising concerns about its long-term sustainability due to high levels of U.S. debt. A growing percentage of central banks believe that U.S. debt levels negatively impact the dollar. However, the study reveals that despite these concerns, central banks generally agree that there is currently no clear alternative to replace the U.S. dollar as the world’s reserve currency. In fact, 53% of central banks now dispute the notion that the dollar will weaken in the next five years, marking an increase from 46% the previous year.
The study also examines the potential role of the Chinese yuan in replacing the U.S. dollar as the dominant global currency. While acknowledging the increasing allocation of Chinese yuan in recent years, the asset manager states that most central banks do not anticipate a significant shift in global trade currencies in the next decade. However, around 27% of central banks expect a gradual shift towards the renminbi. It is worth noting that sentiment surrounding the renminbi’s potential as a true reserve currency has declined year on year, with more central banks expressing skepticism about its attainment of that status within the next five years. Factors such as liquidity, property sector debt, and political risk pose challenges to the renminbi’s potential to surpass the U.S. dollar as the world’s reserve currency. Nonetheless, central banks still anticipate an increase in renminbi holdings over time.
The study’s findings raise an important question: Will the Chinese yuan eventually replace the U.S. dollar as the world’s dominant currency? We invite you to share your thoughts and opinions in the comments section below.
Frequently Asked Questions (FAQs) about central banks diversification
Will the Chinese yuan replace the U.S. dollar as the world’s dominant currency?
Answer: The study suggests that while central banks are diversifying their currency holdings and increasing exposure to the Chinese yuan, most do not anticipate a significant shift in global trade currencies in the next decade. While the renminbi is considered a potential alternative, there are barriers such as liquidity, property sector debt, and political risk hindering its potential to overtake the U.S. dollar as the world’s reserve currency. Nonetheless, central banks expect to increase renminbi holdings over time.
More about central banks diversification
- [2023 Invesco Global Sovereign Asset Management Study](insert study link if available)