Jenga players know that a tower can withstand the removal of many bricks, but in every game it’s a different quantity that can be removed, and a different brick that precipitates collapse.
Although the dollar has unique advantages that prop up its status as the world’s primary reserve currency, these cannot be immutable. Assumptions that underpin historic dominance have slowly been eroded for over two decades. According to the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves data, the dollar is currently home to around 58% of global foreign exchange reserves, compared to 70% at the turn of the century.
As global central banks grapple with a slow-motion decline in the role of the dollar, they might be asking: how many Jenga blocks have now gone, and could the tower collapse?
Which currencies are set to benefit?
In January I wrote for OMFIF that the outlook was a further 10% decline in the weight of the dollar in FX reserves over the next 10 years, and that 10 currencies would benefit. These winners would include the euro, yen, sterling, renminbi and a range of smaller non-traditional currencies. They would all take a small slice.
The news from the US since Donald Trump’s inauguration has added spice to the debate and increased the ‘push’ factor for FX reserves to flow away from the dollar. The forecast for 10/10/10 no longer looks particularly bold. However, a key issue with all forecasts of dollar decline is to figure out which currencies (and bond markets) will benefit from inflows.
OMFIF’s Global Public Investor 2025 confirmed that the primary concern for central bank reserve managers today is geopolitics, and the overwhelming driver of those concerns is tariffs and trade policies. The survey revealed that the dollar was the only currency where net demand from central banks declined last year. Moreover, in a forecast for the next 10 years, the dollar was voted as the currency most likely to give up ground.
The OMFIF survey found that the euro was the most frequently added currency to reserves in the past year, while the dollar was the most frequently reduced. This represents a change from the long-established pattern in which de-dollarisation had primarily resulted in a redistribution of reserves in favour of smaller, non-traditional reserve currencies.
Speculating on the euro
There has been speculation since the German election in February that the euro could finally (after 25 years of continually falling short of forecasts from European banks) make gains at the expense of the dollar. The euro currently accounts for around 20% of allocated foreign exchange reserves, having been at 24% in the early 2000s.
The election result led to the abandonment of the German fiscal debt brake, and large commitment to defence and infrastructure spending. This has prompted some commentators to suggest that the euro, via expanded Bund issuance, could take a large slice of any move away from the dollar.
But there are hurdles. The total euro-denominated government bond market – including European Union-issued bonds – is only half the size of the US Treasury market.
Additionally, the relative advantage of US markets is compounded by the fact that the investment-grade dollar-denominated credit market is approximately three times larger than its euro-denominated counterpart. As the credit quality of government issuers continues to slide, investment-grade credit has become increasingly attractive to global reserve managers.
Europe is too fragmented
A key factor that has limited the euro’s potential as a reserve currency has been the lack of supply in high-quality, liquid euro assets. Sovereign bonds are issued by 20 member states in a patchwork style and across a range of credit ratings.
Joint EU issuance would solve the problem of a fragmented market and, with a probable triple-A rating, would provide an attractive safe asset. However, northern European countries have opposed joint debt, pointing to the risks of debt mutualisation, moral hazard and the no-bailout clause. Moreover, infrequent issuance has had an adverse impact on demand from institutional investors. We are still awaiting the adoption of EU bonds in government benchmark indices.
On the positive side, it is hoped that the imminent launch of a Eurex futures contract for EU issuance will facilitate hedging, improve appetite and encourage predictable bond issuance.
Until this happens, the German Bund market remains the first-choice euro-denominated investment for reserve managers. But the German Bund market is not risk-free.
In a conversation with the head of foreign exchange reserves from an eastern European central bank, doubts about the suitability of German Bunds were raised. His concern was that, in simple geographic terms, Germany might be too close to Russia. This made clear that being a neighbour of Russia had an impact on every aspect of national economic and political policy.
What does collapse look like?
Mark Sobel, OMFIF’s US chair, made the point in 2024 that it would be only actions by the US itself that could bring an end to the dominance of the dollar. Few observers would have expected to see this hypothesis tested so thoroughly in 2025.
What would a collapse of the Jenga tower look like? Using the metric of foreign exchange reserves, this could be a rapid acceleration in the previously modest decline of the dollar. Instead of 10% decline over the next 10 years, it might be a 20% decline in five.
This would be a world where a Chinese sphere of influence is firmly established. China will be important both economically and militarily and the renminbi weight might rise towards 10%. The traditional argument against the Chinese renminbi is that the capital account is still restricted, but this would count for less in a world where trade and defence arrangements set parameters for the deployment of FX reserves.
Perversely, in a fractured world with declining dollar dominance, some nations who are part of the US sphere of influence might be drawn closer. For these close neighbours and allies there might be a need to increase their dollar exposure to prove friendship and alliance credentials.
For most nations there will be a desire to continue the trend of the past two decades, namely, to diversify reserves into a longer list that includes smaller, non-traditional currencies. New instruments such as stablecoins and central bank digital currencies will add layers of complexity. However, they will not shift the key conclusion that the world has a latent desire for more currencies in reserves, but that trade national security considerations will influence choices. The investment of foreign exchange reserves is no longer only about investment safety, liquidity and return.
Long-term investors will have to manoeuvre around the fallen Jenga bricks, staying nimble as bond yields, credit spreads and currencies are bounced around. This will be an environment that calls for active management by professionals with experience of managing assets through periods of rapid change in capital market valuations.
Gary Smith is Head of the Client Portfolio Management team, Fixed Income, EMEA, at Columbia Threadneedle.
Join OMFIF and the Global Public Investor Working Group at the International Monetary Fund-World Bank annual meetings to dive deeper into the findings of OMFIF’s 2025 survey.
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