(Kitco News) - The de-dollarization trend that has dominated global financial markets for nearly two years and supported gold prices at record highs is less dramatic than initially portrayed, according to a research report from the Federal Reserve Bank of New York.
In a report published last week, analysts at the regional central bank argued that while global U.S. dollar assets held by central banks have fallen 7% between 2015 and 2021, countries are not moving away from dollars en masse.
“A narrative has emerged that an observed decline in the share of dollar assets in official reserve portfolios represents the leading edge of the dollar’s loss of status in the international monetary system,” the analysts wrote. “Drawing on recent research and analytics, this post questions these narratives, arguing that these observed aggregate trends largely reflect the behavior of a small number of countries and do not represent a widespread effort by central banks to diversify away from dollars.”
The analysts said that according to their research, nearly half of the 7% decline in U.S. dollar reserves is not attributable to changes in dollar preferences.
While some countries have been actively moving away from the U.S. dollar, the New York Fed said that this trend is dominated by two countries: India and China. They noted that these two nations account for roughly 2.9 percentage points of the 7% decline.
However, the timeframe the regional central bank is using is a little dated. According to the latest Treasury data, China has sold $53.3 billion worth of U.S. Treasuries and agency bonds within the first three months of 2024
In another example, during the six years, Russia saw its foreign reserve holding grow significantly as its U.S. dollar reserves dropped, accounting for another 1.8% of the decline.
However, the analysts also noted that there were other factors behind the decline in U.S. dollar reserves.
The analysts noted that the Swiss National Bank also reduced its U.S. dollar holdings between 2015 and 2021, which accounted for 1.8% within the broader trend.
“The observed effect contributed by Switzerland is due to its accumulation of euros, largely as a result of a monetary policy framework that at times limits movements in the euro–Swiss franc pair. This contribution is, then, a story of Swiss monetary policy, and not one of a declining preference for dollar assets,” the analysts said.
The analysts said that only a handful of nations have an outright aversion to the U.S. dollar.
“The decline in the dollar preferences of a small group of countries (notably China, India, Russia, and Turkey) and the large increase in the quantity of reserves held by Switzerland explain most of the decline in the aggregate dollar share of reserves,” the analysts said. “Our research finds that the main drivers of portfolio allocations continue to be the traditional ones that stress currency pegs, proximity to the euro area in trade, and debt exposures.”
The New York Fed analysts also looked at gold’s role in the global marketplace as some countries look for U.S. dollar alternatives.
For the last two years, the gold market has seen unprecedented central bank demand. Official gold holdings increased by more than 1,000 tonnes in 2022 and 2023. In April, the World Gold Council said central bank net demand totaled 290 tonnes in the first quarter of 2024—the strongest start to any year on record.
“Gold’s seeming safety from sanctions has been widely viewed as a particularly salient factor behind official gold purchases since Russia’s invasion of Ukraine in 2022 and the G7 countries’ subsequent decision to freeze the foreign exchange reserves of Russia’s central bank and forbid their banks from doing most business with Russian counterparts,” the central bank analysts said. “Central banks themselves have noted sanctions concerns as a driver of gold purchases and of increased vaulting of gold domestically in recent reserve manager surveys.”
Although central banks have been buying gold at an exceptional pace, the New York Fed said it does not see the trend expanding. The analysts noted that only a small number of nations are buying gold.
“While these gold purchases are certainly notable, the broader implications for central banks are limited,” the analysis said. “IMF country-level data suggest that most of the increase in official gold holdings has come from just a few central banks. More than half of reported gold accumulation since 2009 was from China and Russia, with another quarter coming from a handful of emerging market central banks (Turkey, India, Kazakhstan, Uzbekistan, and Thailand).”
The analysts also noted that gold held in reserves has its limitations.
“Gold retains important shortcomings as an alternative to fiat currencies. It bears no interest and, as a physical asset, is difficult to use in transactions, to say nothing of its high transportation, warehousing, and security costs,” the analysts said
