It's Called De-dollarization, But Why Is the Dollar Still Number One?

When scrolling through economic news portals, one sentence has been appearing quite frequently lately.

“Central banks dump the dollar for gold.” At first, I didn’t think much of it, but after seeing similar headlines for several months, I became curious.

Are global central banks really dumping the dollar, or is something more complex happening that the headlines are oversimplifying into a single term?

Furthermore, these articles are always accompanied by a similar graph: one showing the share of the dollar slowly declining while the share of gold gradually rises. However, it is surprisingly rare to find articles that explain the real reasons underlying this trend.

As it happens, a recent report from the Bank of Korea’s Economic Research Institute answers this question quite honestly.

To start with the conclusion, the term “de-dollarization” only explains half of what is currently happening. The other half is much more interesting and far more calculated.

The Real Reason Behind the Flood of De-dollarization News

Looking strictly at the numbers, the term “de-dollarization” is not entirely wrong.

According to data released by the European Central Bank (ECB), the share of gold in global central bank reserve assets has reached 27%, jumping 7 percentage points from a year ago. During the same period, the share of U.S. Treasuries fell from 25% to 22%. For the first time, gold has surpassed U.S. Treasuries as a single asset class.

Survey results are even more dramatic.

In a survey of 74 central banks worldwide conducted by OMFIF, an independent London-based think tank, respondents who said they would decrease their dollar share over the next 10 years outnumbered those who said they would increase it for the first time. The World Gold Council (WGC) survey also recorded an all-time high in the percentage of central banks planning to increase gold holdings within the year.

At this level, the “de-dollarization” headline is not an exaggeration. However, these figures only show the surface of reserve assets—namely, just the currency composition. The point the Bank of Korea report delves into is what comes next.

Does the actual role of the dollar decrease just because the currency composition changes? This is the core question.

The Three Layers of Reserve Asset Restructuring Examined by the Bank of Korea

the report does not lump current changes into a single trend. Instead, it breaks them down into three distinct layers.

First is Currency Composition: The adjustment of weights between the dollar, euro, gold, and non-traditional currencies.

Second is Currency Function: The actual roles the dollar plays in international settlements and crisis management.

Third is Asset Composition: The issue of whether one holds long-term or short-term bonds, even within dollar-denominated assets. The report’s starting point is that mixing these three layers causes three completely different types of changes to be tangled up in the single sentence: “the dollar share has decreased.”

When separated this way, it becomes clear that almost all the “de-dollarization” coverage by the media has focused on the first layer: currency composition.

The other two layers were moving in different directions or even in the opposite direction. If you ask why it is necessary to divide them this way, the answer lies in the following paragraph.

When managing reserve assets, central banks are always concerned with safety, liquidity, and profitability. Recently, however, after the freezing of Russian foreign exchange reserves, a new standard has been added: the risk that assets might be tied up by sanctions and rendered unusable, so-called accessibility. The report views that this accessibility issue is restructuring the entire selection of reserve assets.

Category	Liquidity Tranche	Investment Tranche
Main Purpose	Intervention in foreign exchange markets, responding to short-term external debt	Long-term value preservation and profitability enhancement
Additional considerations due to rising geopolitical risks	Trade-off between asset liquidity ↔ protection against sanction risks	Adding sanction risk protection to existing risk/return diversification

Table: Trade-off between asset liquidity and sanction risk protection by reserve asset management purpose

To break down the table: Money that needs to be used immediately for forex market intervention or paying off short-term debt—the liquidity tranche—must be convertible to cash as quickly as possible. On the other hand, the remaining money that isn’t immediately needed—the investment tranche—is managed with a focus on long-term value preservation and returns.

Geopolitical risk has added a new variable to both of these windows.

In the liquidity window, a trade-off has emerged between asset liquidity and protection against sanction risks, while in the investment window, the goal of sanction risk protection has been added to the existing risk/return diversification strategy.

The Real Reason Central Banks Are Increasing Gold Holdings

Gold is the asset where this trade-off is most clearly visible.

According to research cited by the report (Arslanalp et al., 2023), countries more exposed to financial sanctions from major reserve currency issuers tend to increase their gold holdings more significantly. Empirical results also show that the further a country is politically from the U.S.—that is, the lower its alignment in UN General Assembly voting—the greater the increase in gold holdings when geopolitical risks rise.

The reason is simple.

U.S. Treasuries are highly liquid but remain under the sanction authority of the issuer, the U.S. Conversely, gold is not the debt of any specific country, so while it is relatively less risky to be tied up by sanctions, it is difficult to liquidate quickly in the market. The calculation behind the recent gold-buying rush is that countries are willing to sacrifice some liquidity to hold assets free from sanctions.

Looking at the figures, the response speed is also quite fast.

Tracking quarterly data after a geopolitical risk shock, the share of gold holdings begins to rise noticeably from the third quarter after the shock and settles at a level about 4 percentage points higher than before the shock after about a year. Furthermore, if you isolate countries that are politically distant from the U.S., this response magnitude appears even larger than the overall average. This means that the more a country feels that geopolitical risk is not just someone else’s problem, the faster and more heavily it fills its vaults with gold.

What is interesting is the direction of currency diversification.

Looking at other research cited in the report (Arslanalp et al., 2022), of the share lost by the dollar, about a quarter moved to the yuan, while the remaining three-quarters were scattered among various non-traditional reserve currencies like the Australian dollar and the Canadian dollar. This suggests it is more of a diversification strategy to reduce reliance on a specific issuer. It is closer to putting eggs in many baskets rather than the emergence of a new dominant player. If the shift to the yuan were real, it would be a story of a camp change—“yuan instead of dollar”—but the current picture is much closer to “lowering the dollar share slightly and splitting the rest as finely as possible."

As Geopolitical Risk Grows, Vault Locations Diverge

There is one more notable point here.

Just as important as how much gold one holds is where that gold is stored, as this determines actual usability. The IMF study introduced in the report (Mak and Vaccaro-Grange, 2026) explains that storing gold in overseas financial hubs is advantageous for international market transactions and collateral use, but it is subject to the legal jurisdiction of the custodian. Conversely, domestic storage offers high physical control but requires more effort for international transactions.

In fact, in the 2026 World Gold Council survey, while 57% of responding central banks said they use the Bank of England for gold storage, the percentage of respondents who increased domestic storage over the past year was 9%, and 10% said they diversified overseas storage, both higher than the previous year (5% and 2%, respectively). This means they are adjusting where they keep their gold just as much as how much they own.

This shows that gold is closer to a conditional shield whose utility varies depending on how it is stored, rather than a magic key to avoid sanctions. If you keep it in your own vault, control is certain, but it takes more effort when you need to use it as collateral or sell it urgently in the international market. If you entrust it to an overseas financial hub like London, transactions become easier, but it risks being tied up by that country’s laws and political situation. There is no perfect answer, and each country is managing that trade-off according to its own situation.

Dollar Share May Drop, But Dollar Liquidity Remains

So, is the era of the dollar coming to an end? The report pivots here.

It suggests that even if reserve asset diversification proceeds, the core function of the dollar in providing foreign currency liquidity during crises is likely to be largely maintained. According to research cited by the report (Aizenman et al., 2026), countries that hold more dollar reserve assets were better able to mitigate exchange rate depreciation pressure when hit by U.S. monetary tightening shocks. Conversely, non-dollar reserve assets had a smaller and statistically insignificant mitigation effect.

The inertia of the international monetary system itself is also substantial.

Another study cited by the report (Bordo and Bastidon, 2026) ran a non-linear model reflecting variables in five categories: technology, economic development, monetary/fiscal systems, politics/conflicts, and regulatory environments. Even when various stress scenarios were applied, the dollar’s dominance was only limitedly weakened, and no new central currency—whether the euro or yuan—emerged to replace it. Considering it took decades for the pound to completely cede its reserve currency status to the dollar, it implies that monetary hegemony is not something that flips overnight.

To summarize:

The dollar’s share within reserve assets is narrowing, but the currency people turn to when a crisis erupts is still the dollar. This shows that currency composition and currency function do not move at the same speed.

The Landscape Within U.S. Treasuries Is Also Changing

When moving to the third layer, asset composition, the story shifts once again.

The report explains this part by borrowing the concept of convenience yield.

Convenience yield is the value converted into a return rate of the benefits—such as safety, liquidity, and collateral value—obtained simply from owning a certain asset. According to research cited by the report (Du, Keerati, and Schreger, 2026), the convenience yield of the dollar itself has remained high since the global financial crisis, while the convenience yield of U.S. Treasuries has fallen significantly, with the decline particularly pronounced in medium-to-long-term bonds.

Another study (Acharya and Laarits, 2026) analyzing the period after the tariff policy shock in April 2025 is more specific.

Before the shock, the safe-asset premiums of 10-year, 5-year, and 2-year Treasuries moved at similar levels, but after the shock, the premium of the 10-year bond fell much more sharply than that of short-term bonds. During the same period, the hedging function of long-term Treasuries, where yields move inversely to stock prices to offset risk, also weakened, while short-term Treasuries maintained that function relatively well. Indeed, a study examining country-level data (Rajhi, 2026) showed that after the 2022 Russian sanctions, countries more exposed to sanction risks expanded the share of short-term bonds rather than long-term ones.

In summary, the core issue is not an attempt to reduce dollar assets themselves. It means an adjustment is taking place within the dollar, shifting to short-term bonds that are easier to cash out because the appeal of long-term assets is falling. This is a movement that wasn’t visible if you only looked at the currency name.

Why Is the Bank of Korea Cautious About Gold Holdings?

What is Korea’s position in this flow?

While other central banks are racing to fill their vaults, the Bank of Korea is closer to the cautious side. A Bank of Korea official stated in a media interview that gold, unlike other currency assets, is not an asset whose weight can be nimbly adjusted according to market prospects. There were concerns that because liquidity is relatively low, the moment they try to resell it due to changing market outlooks, it could send an unexpected signal to the market. They expressed the position that maintaining dollar liquidity is more desirable than increasing gold holdings.

This judgment aligns with the logic of the report discussed earlier. In the liquidity tranche, where one must respond to short-term foreign currency demand, the possibility of immediate cash conversion is as important as safety, and gold is at a disadvantage compared to Treasuries in this regard. On the other hand, in the investment tranche aiming for long-term value preservation, the advantage of sanction risk protection is highlighted. The evaluation of the same gold changes completely depending on which window it is placed in, and it is interpreted that the Bank of Korea has been weighing the liquidity calculation more heavily so far.

The Paradox of Reserve Asset Restructuring

Following the three layers this far brings us back to the initial question.

Is the current change de-dollarization or not? The report’s answer is closer to neither. Diversification is underway in currency composition, the dollar’s role is maintained in currency function, and the maturity structure is being separately adjusted in asset composition. Trying to combine three different pictures into one word made “de-dollarization” only half the story.

There is one part I pondered over for the longest time while reading this report.

If reserve asset diversification leads to a decrease in demand for long-term U.S. Treasuries, which pushes up U.S. long-term interest rates and tightens global financial conditions, then for emerging countries with weak external financial conditions, the need for dollar liquidity for crisis response could paradoxically increase, the report points out. Diversification that began to avoid sanctions could ironically make those countries more dependent on the dollar when a crisis hits. It made me pause because it means diversification does not always work in the direction of safety.

This path is more tightly connected than one might think.

There is empirical research (Beltran et al., 2013) suggesting that if the overseas public sector reduces its purchases of U.S. Treasuries, the force that lowered long-term Treasury yields weakens, leaving room for interest rates to rise. There is also the point that if reserve assets move from long-term bonds to short-term bonds, gold, and non-traditional assets, demand for long-term Treasuries can weaken selectively even if total dollar holdings do not decrease significantly. Furthermore, looking at research cited by the report (Aizenman et al., 2026), the extent to which U.S. monetary tightening shocks are absorbed by dollar reserve assets varies by country, and the cushioning effect was weaker for countries without currency swap/repo lines with the U.S. Fed and those with high external dollar debt.

Ultimately, this means that countries with less room to diversify reserve assets could be more exposed to a dollar drought when a crisis hits. Taking this a step further, looking at research on a hypothetical scenario where the dollar’s reserve currency status weakens structurally in the long term (Jiang et al., 2026), it leads to the conclusion that U.S. real interest rates could actually rise as domestic U.S. investors absorb the portion of dollar bonds reduced by foreign investors. It is a scenario for the distant future rather than something happening right now, but the directionality is linked to the current trend of diversification.

Therefore, the report concludes that when evaluating the adequacy of reserve assets, it is not enough to look only at total holdings or nominal currency weights; one must check five dimensions together: currency, commodity, maturity, custody, and usability.

It means that even if the storehouse is the same size, what is stacked inside, in terms of maturity and storage method, can completely change the portion that can actually be used when a crisis strikes.

This perspective is not just for the central banks of individual countries.

Individual investors can also ask similar questions when allocating assets. Are risks truly diversified just because a variety of currencies or stocks are listed, or have you just piled up a lot of assets that are difficult to cash out when you really need them?

Next time you see the headline “Central banks dump the dollar for gold,” it is worth recalling the three different stories and five checklist items hidden within.