Recent episodes of tariffs, sanctions, and interference of the US in economic decisions of sovereigns would only hasten the shift away from the dollar.
US treasuries are considered the safest forex asset as the dollar continues to be the main global currency. In fact, the US virtually controls the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments system, as all banks get linked to this set-up. When the Ukraine war started, all payments to Russia were blocked by the US which had imposed sanctions on the aggressor. The blow was severe but also a signal to other nations of such possibilities. US treasuries, hence, are still preferred by all central banks; but things have been changing.
The US’s infallibility was questioned when the debt ceiling issue emerged on several occasions. These limits were then raised, but discussion has focused on exploring alternatives to the dollar. This is why countries have been diversifying their forex holdings, even as the dollar remains dominant.
Shifting patterns in US debt holdings
A look at the ownership pattern of US treasury securities is interesting. Over the last 10 years or so, the US’s total public debt increased from $18.15 trillion in March 2015 to $36.21 trillion in March 2025 — an increase of almost 100%. The share of foreign holdings, largely those held by various central banks, was as high as 34% in 2015. It has come down to 24.9% in March 2025. This does reveal two things that are reflections of each other. First, central banks are diversifying their holdings. Second, the US government is less dependent on foreigners for subscribing to their debt, which is compensated for by domestic holders.
Further, the holdings of the Federal Reserve has come down from 41.4% in March 2015 to 31.8%. This can be explained by the fact that when the Fed went into the quantitative easing mode, banks tended to sell their treasuries to the Fed for liquidity. As this process eased, the Fed’s share tended to move downwards. Mutual funds have increased their treasury holdings — the share has gone up from 6.4% to 12.2%. The support provided by the Fed is still very significant, at almost a little less than a third. This can be contrasted with the Reserve Bank of India’s holding of central government debt — 12-13%. Clearly, the US government’s dependency on the central bank is greater.
The same also gets reflected when the share of currencies in overall forex reserves at the global level is considered. Between 2016 and 2025, International Monetary Fund data shows, the dollar’s share has come down from 65.5% to 57.7%. In contrast, there has been an increase for other currencies like the euro (19.6% to 20.1%), pound sterling (4.7% to 5.2%), yen (3.7% to 5.1%), and renminbi (from virtually nil to 2.1%). Such diversification is also the result of the gradual change in the balance of power across the world economy. While the dollar is still dominant, countries are investing in other hard currencies. The euro will continue to be the second most dominant currency as all member countries hold their forex assets in this form. It will get progressively popular as its acceptability has been growing, given the orderly management of the economy since the 2011 euro crisis.
Gold’s resurgence as a safe haven
It has also been observed that central banks have been increasing their gold holdings as part of their forex reserves over time. World Gold Council data for June 2015-June 2025 shows some interesting patterns. All big economies have increased the share of gold in forex reserves. Covid-19 was the turning point, followed by the Russia-Ukraine war, leading to sanctions being imposed by the US. With the tariff issue causing further uncertainty, gold becomes the natural safe haven.
Gold share in forex reserves rose from 5.9% to 13.1% for India, from 1.7% to 6.7% for China, 8.3% to 16.6% for the UK, 10.1% to 19.4% for South Africa, and 6.3% to 13.2% for Australia. In a way, there is a case to believe that countries are de-risking their interests from the idiosyncratic policies followed in the US. Even developed countries like Germany, Italy, and France have increased their share of gold holdings by over 10 percentage points during this period. It is not surprising that the price of gold has received an impetus due to this demand factor.
The recent episodes of tariffs, sanctions, and interference of the US in economic decisions of sovereigns would only hasten this shift away from the dollar. The world has already started moving towards more free trade agreements as well as economic blocs that the US is opposed to. As these agreements become stronger and wider in terms of coverage of nations, it is natural that the currencies used will tend to change. The payments systems will also see the rise of alternative channels to SWIFT. The lesson is that the US needs to be more flexible in taking on the role of the anchor nation and currency vis-à-vis developing and maintaining the global economic order.
The writer is chief economist, Bank of Baroda.
