Is the greenback no longer seen as a safe haven?

In the latest Capital Letter, I’ve written about signs that the dollar is no longer seen as quite such a safe haven as in the past, a shift linked to a reduction, at least at the margin, in the extent to which the greenback functions as a (sort of) global reserve currency.

I noted the way in which central banks have been adding to their gold holdings:

Central bank gold reserves are hitting levels last seen in the Bretton Woods era, which ended in 1971. According to the FT, they reached 36,000 tonnes in 2024, a figure not too far short of its mid-1960s’ peak (38,000 tonnes). The FT singles out the central banks of India, China, Turkey and Poland among those doing the buying. The former two (or three: Turkey?) have seen how Western sanctions regimes have made holding euros and dollars far riskier than once anticipated. Poland, which has wisely stayed out the euro, has a better understanding than most of how badly things might go to its east. Should Russia’s military move against an European Union country, which is better likely to hold its value, gold or the euro?

Now there’s this from the Financial Times:

A record 95 per cent of respondents to a World Gold Council survey expect global central banks’ gold holdings to increase over the next 12 months, the highest level since the annual poll started in 2018.

Meanwhile three-quarters of respondents expect central banks’ US dollar holdings to decline over the next five years. More than 70 central banks responded to the industry body’s survey.

The FT’s story comes with a revealing twist:

in a sign of how geopolitical tensions are impacting the gold world, some central banks plan to store more bullion domestically — as opposed to in London and New York, which are the world’s two largest such repositories. Concerns about central banks’ ability to access gold stored overseas in the event of a crisis, or in case of sanctions, have contributed to a small but not insignificant trend of repatriation, with more storing gold domestically.

That’s not a positive indication of the international mood, nor of trust in the U.S. As noted in the FT’s report:

Central banks’ gold buying accelerated in 2022, after the Russian invasion of Ukraine, and subsequent US efforts to freeze Moscow out of the international payments system. That prompted many emerging market central banks to start diversifying faster away from the US dollar.

Thanks to American domination of the “plumbing” of the global financial system, even holding dollars could be a risk for a country that had found itself subject to U.S, sanctions, something that is also likely to have weighed on countries that thought that they might one day find themselves on the wrong side of Uncle Sam.

Discussing sanctions regimes in a Capital Letter back in March 2022, I worried that “in weaponizing, one way or another (for reasons that can range from fighting crime to fighting Putin) the almost universal acceptance of the dollar as a store of value,” the U.S. risked hurting itself:

That the greenback is the reserve currency is one of the foundations of American power (not least because of the way that it allows this country to finance itself). But the more that the U.S. uses the dollar as a weapon, the more (over time) it will undermine the willingness of others to put their faith in it, with consequences that, to say the least, could be self-defeating.

This is only one element responsible for the current flight from the dollar, but it is undeniably a part of it.