Big bank note highlights accelerating global de-Dollarization

I’ve been talking about the de-dollarization trend for several years. Now, some of the world’s big financial players are starting to take notice.

In a recent note, JPMorgan Chase highlighted the de-dollarization trend, pointing out that dollar reserves have dipped to a 2-decade low below 60 percent.

Total holdings of dollar-denominated securities by central banks (excluding the Federal Reserve) fell by $59 billion in 2024.

As of the end of last year, dollars made up 57.8 percent of global reserves. That is the lowest level since 1994, representing a 7.3 percent decline in the last decade. In 2002, dollars accounted for about 72 percent of total reserves.

The JPMorgan note said the waning dependence on the U.S. dollar in trade is being reflected in the gold market as central banks pile up gold.

“The main de-dollarization trend in FX reserves, however, pertains to the growing demand for gold. … This increased demand has in turn partly driven the current bull market in gold, with prices forecast to climb toward $4,000/oz by mid-2026.”

The note highlighted the increased gold holdings by “competitor economies," including China, Russia, and Turkey.

“Seen as an alternative to heavily indebted fiat currencies, the share of gold in FX reserves has increased, led by emerging market (EM) central banks — China, Russia and Türkiye have been the largest buyers in the last decade.”

The note pointed out that emerging market central bank gold holdings remain relatively low at 9 percent, but gold reserves have more than doubled from 4 percent 10 years ago.

The big bank also highlighted signs of de-dollarization in the bond market, noting that foreign holdings of U.S. debt have dropped continuously for 15 years. In early 2025, foreign Treasury holdings plunged to 30 percent, down from 50 percent during the Great Recession.

JPMorgan Chase head of rates strategy Jay Barry said that any acceleration in Treasury selling could create significant turmoil in the bond market.

“Although foreign demand has not kept pace with the growth of the Treasury market for more than a decade, we must consider what more aggressive action could mean. Japan is the largest foreign creditor and alone holds more than $1.1 trillion in Treasuries, or nearly 4 percent of the market. Accordingly, any significant foreign selling would be impactful, driving yields higher.”

The federal government is already struggling to cope with increased borrowing costs due to rising yields and tepid demand for Treasuries. Interest on the national debt cost $144.6 billion in June alone. That brought the total interest expense for the fiscal year to $921 billion, up 6 percent over the same period in 2024.

Why are countries spurning the Dollar?

There are several factors driving the de-dollarization trend.

First, many countries are concerned about the weaponization of the dollar.

De-dollarization has accelerated since the U.S. and other Western nations imposed heavy sanctions on Russia in the wake of its invasion of Ukraine.

According to a report by the Atlantic Council, “In recent years, and especially since Russia’s invasion of Ukraine and the Group of Seven (G7)’s subsequent escalation in the use of financial sanctions, some countries have been signaling their intention to diversify away from dollars.”

Aggressive U.S. trade policy has also created some backlash against the U.S., leading to a selloff in American assets.

Finally, the federal government’s deteriorating fiscal position, with over $36 trillion in debt and no sign that the borrowing and spending will slow any time soon, has many wary of holding U.S. debt and devaluing dollars. This has been particularly evident in the Treasury market, where yields rose as bonds sold off during the height of geopolitical uncertainty in April. It appears Treasuries are losing their standing as a go-to safe-haven asset.

Ramifications

As the JPMorgan note pointed out, we’ve seen dollar reserves dip before. The dollar’s share of FX reserves was lower in the early 90s after the world fled the greenback during the 70s and 80s. The dollar’s status improved in the 1990s as price inflation cooled, and U.S. budget deficits narrowed thanks to the post-Cold War “peace dividend.”

The JPMorgan note called the dollar’s decline “significant but not yet unprecedented.”

In other words, the dollar isn’t in danger of collapsing or even losing its reserve status – at least not yet.

However, even a modest de-dollarization spells trouble for the federal government and the U.S. economy.

In a nutshell, the United States needs the world to need dollars.

The U.S. depends on this global demand for dollars supported by its reserve status to underpin its massive government. The only reason Uncle Sam can borrow, spend, and run massive budget deficits to the extent that it does is the dollar’s role as the world's reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.

WolfStreet summed up the risk the U.S. faces as the dollar’s status continues to erode.

“The status of the U.S. dollar as the dominant global reserve currency has helped the U.S. fund its twin deficits and thereby has enabled them: the huge fiscal deficit every year and the massive trade deficit every year. The reserve currency status comes from other central banks (not the Fed) having purchased trillions of USD-denominated assets such as Treasury securities, other government securities, corporate bonds, and even stocks. The dollar's status as the dominant reserve currency has been crucial for the U.S., and as that dominance declines ever so slowly, risks pile up ever so slowly.”

While the threat isn’t immediate, a slowly growing pile eventually turns into a giant pile.

But again, even a modest de-dollarization will have significant impacts. If the world needs fewer dollars, they will begin to return to the U.S., causing a dollar glut. This will increase inflationary pressure domestically as the value of the U.S. currency further depreciates. In the worst-case scenario, the dollar could collapse completely, leading to hyperinflation.

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