The global dominance of the US dollar can no longer be taken for granted, even if no clear alternative global reserve currency has yet emerged. As researchers at JPMorgan dryly observed, “de-dollarisation has increasingly become a substantive topic of discussion among investors, corporations, and market participants more broadly.”

The end of the USD’s reserve status would reshape the global economy and US asset markets. However, this outcome is far from certain in the foreseeable future.

In the short term, however, as the JP Morgan note makes clear, signs of de-dollarisation are evident across various asset markets, including the bond and commodity markets.  

One area cited is central bank FX reserves, where, according to the report, the share of USD has fallen to a 20-year low. While some of that reallocation has gone to other currencies, “the main de-dollarization trend in FX reserves, however, pertains to the growing demand for gold. Seen as an alternative to heavily indebted fiat currencies, the share of gold in FX reserves has increased”.

Insiders & outsiders

We’ve previously discussed an arguably underappreciated driver of central bank appetite for gold: to avoid US sanctions. Gold offers states a stable, liquid store of value that can function outside the US dollar system.

In other words, states that are, or think they might be, excluded from the US dollar system are quite rationally incentivised to stockpile gold.

But now even countries that are integrated into the Western financial system have been increasing their gold holdings, not just as a long-term hedge but as a signal of waning confidence in the durability of dollar supremacy today.

Hedging the interregnum

For now, the dollar remains the only game in town. As Jennifer Johnson-Calari explains in remarks published by the World Gold Council (WGC), “there is no credible challenger or contender who is able to provide the world with a currency with the depth and quality of markets to replace the USD.”

At the same time, Johnson-Calari suggests, the surging gold price could be evidence of a paradigm shift: “The recent run-up in the price of gold is likely signalling the start of a transition from a hegemonic to a more multi-polar system but a transition that is likely to occur only gradually and in stages.”

Such an outcome is far from predetermined, and it is premature to bet against a resurgence of US dominance. But the mere fact that de-dollarisation has already become such a ‘substantive topic’ among serious investors creates uncertainty enough. In this context, gold remains attractive as a reliable hedge.

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