The U.S. Dollar Index, when measured against a basket of other major currencies, has declined by approximately 10% this year through mid-June and is currently trading at its lowest level in three years.
That’s no small dip, and there may be additional downside risk due to concerns over America’s growing deficit and the ongoing fluctuations in tariffs.
In a note to clients last week, UBS says the dollar is now “unattractive,” with further declines expected as the U.S. economy slows.
Meanwhile, Bloomberg reports that foreign vendors—from Latin America to Asia—are asking U.S. importers to settle invoices in euros, pesos and renminbi to avoid the currency swings.
This is a far cry from the post-World War II era, when the greenback was the unquestioned default for global transactions.
Gold Now the Second-Largest Reserve Currency, Following the Dollar
One of the surest beneficiaries of the dollar’s weakness has been gold. Priced in dollars, the precious metal has tended to move inversely with the dollar’s value.
That inverse relationship has been on full display this year, with gold trading above $3,400 per ounce, approximately $100 off its record high.
Even at these elevated prices, central banks around the world have continued to accumulate. According to the World Gold Council (WGC), official sector gold purchases exceeded 1,000 tonnes in each of the last three years, which is more than double the annual average of the previous decade. Institutions now hold nearly as much gold as they did back in 1965, during the Bretton Woods era.
A recent European Central Bank (ECB) report noted that, for the first time ever, gold now represents a larger share of total global foreign exchange reserves (20%) than the euro (16%).
This is remarkable, and it aligns with recent survey data from the WGC showing that 95% of central banks expect to increase their gold reserves over the next 12 months. That’s the highest figure since the WGC’s survey began.
The Global South Is Leading the Way
Much of the gold buying is occurring in the Global South. Countries like Turkey, India, China and Brazil have all increased their gold holdings in recent years.
Many of these nations are also exploring alternatives to the dollar-based financial system, which they increasingly see as a source of vulnerability rather than stability.
Consider Asia. CNBC reported how member countries in the Association of Southeast Asian Nations (ASEAN) are implementing a regional plan to reduce their dependence on the dollar by settling more trade in local currencies.
China is doubling down on its own payments network, the Cross-Border Interbank Payment System (CIPS), which offers a yuan-denominated alternative to SWIFT—the Society for Worldwide Interbank Financial Telecommunication, which facilitates international transactions between banks and institutions. Just this month, China announced six new foreign banks as participants in the system, stretching its reach across Africa, the Middle East and Central Asia.
Sanctions Could Be Accelerating the Trend
Since Russia’s invasion of Ukraine in 2022, Western sanctions have highlighted the risks of holding too many dollar-based assets. According to the ECB, in five of the 10 largest annual increases in gold’s share of central bank reserves since 1999, the country in question had been sanctioned either that year or the one before.
For many emerging economies, gold serves as a form of geopolitical insurance. Treasury holdings and access to SWIFT can be frozen at any time. It’s more challenging to do the same with physical gold stored in a domestic vault.
What It Means for American Investors
To be clear, the dollar isn’t going anywhere anytime soon. It still dominates global trade and debt markets, accounting for around half of all transactions worldwide.
But its supremacy is gradually slipping, and the evidence is mounting.
That means American investors—especially those in or approaching retirement—should think carefully about how exposed their portfolios are to a single currency. Just as central banks are hedging their dollar exposure with gold and foreign assets, individuals and households may want to do the same.
As most of you know, I’ve long advocated the 10% Golden Rule. Consider allocating 10% of your portfolio to gold and gold-related investments—5% in physical bullion, and 5% in high-quality gold mining stocks.