Despite Global Reserve Asset Reshuffling Including "Increased Gold Holdings," Dollar-Centric System Remains

Reserve Asset Reshuffle: Expansion of Gold Holdings and Diversification into Nontraditional Reserve Currencies
Still, “Portfolio Adjustments Within the Dollar-Centric System” Rather Than Full-Scale De-dollarization
“Dollar Liquidity Retains Its Crisis-Response Function”
Structural Shifts Observed in the Product and Maturity Composition of Dollar Assets

As geopolitical risks expand and fragmentation intensifies, the risks of financial sanctions and asset freezes have emerged as significant factors influencing the selection of reserve assets. However, recent changes are assessed to be more about diversifying and adjusting portfolios within the dollar-centric system, rather than a full-scale move toward de-dollarization. Currently, the reshuffling of reserve assets can be seen in the form of increased gold holdings and diversification into nontraditional reserve currencies, with U.S. dollar liquidity still playing a crisis-response role and the composition and maturity structure of dollar assets being adjusted accordingly.

An employee is organizing foreign currency at the Hana Bank Counterfeit Prevention Center in Jung-gu, Seoul. Photo by Yonhap News.

According to the Bank of Korea on September 26, the Economic Research Institute presented this analysis in a recently published BOK Economic Research Insight report titled “Geopolitical Fragmentation and the Reorganization of Global Reserve Assets” (by Lee Chan-ho and Sim Hye-jin).

With rising geopolitical risks and intensified economic and financial fragmentation, the importance of financial sanctions and asset freeze risks is growing when assessing reserve assets. Even highly liquid and creditworthy assets may not be fully available for use in times of sanctions. Recent research indicates a potential trade-off between the high asset liquidity of key-currency government bonds and the protection from sanction risks offered by gold.

Previous studies have observed a trend toward reducing concentration in any specific currency or issuing country by expanding gold holdings and diversifying reserve currencies. However, the decrease in the share of the U.S. dollar is being dispersed across multiple nontraditional reserve currencies, rather than being concentrated mainly in the Chinese yuan. According to earlier research, about one-quarter of the decrease in the dollar share moved to the yuan, while the remaining three-quarters shifted to other nontraditional reserve currencies such as the Australian dollar and Canadian dollar.

Lee Chan-ho, Associate Research Fellow at the International Economics Research Division of the Bank of Korea’s Economic Research Institute, noted, “This suggests that recent diversification of reserve currencies is more about portfolio dispersion to reduce concentration risk in a particular issuing country, rather than replacement by a new single reserve currency.” He added that this diversification is driven not only by traditional factors such as risk-return distribution and trade/financial linkages, but also by additional geopolitical risks.

Nevertheless, research findings show that diversification in reserve asset composition does not necessarily weaken the international currency or crisis-response function of the dollar to the same extent. Recent studies have found that while the global liquidity function of the dollar remains significant, the convenience yield and the safe haven/hedging attributes of U.S. Treasuries may weaken, especially for longer-term bonds. One study analyzed that, following the tariff policy shock in April of last year, the convenience yield and stock market hedging function of long-term U.S. Treasuries declined, whereas short-term Treasuries maintained their safe-haven role. The authors explained that this is consistent with investor demand moving from long-term Treasuries toward short-term securities and gold. When uncertainty surrounding the price volatility and hedging function of long-term Treasuries grows, there may be an incentive to adjust some dollar assets into short-term, highly liquid assets to maintain dollar liquidity while reducing duration risk.

Lee further analyzed, “It is necessary to distinguish between the dollar's role as an international currency and the safe-haven function of dollar-denominated assets. Even if the dollar’s core role remains intact, there can still be changes in the underlying products and maturities within dollar assets.” He summarized, “Comprehensive review of the literature suggests that the reorganization of reserve assets can occur not only through currency diversification, but also by adjusting the product and maturity structure within dollar assets and changing the storage and custody structures for gold. These composition changes could affect not only the external shock response capacity of individual countries, but also U.S. Treasury demand, U.S. interest rates, and, ultimately, global financial conditions.”

Particularly, Lee assessed that if public sector demand for long-term U.S. Treasuries declines and global financial conditions tighten, there could paradoxically be an increased need for emerging economies to secure dollar liquidity in response to crises. He emphasized, “When evaluating the adequacy of reserve assets, it is necessary to assess not only the total volume or nominal currency shares, but also the asset composition and their practical usability in times of crisis.”

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