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Picture Courtesy: Indian Express

Context:

US dollar fell to a four-month low but the price of gold crossed the $5,000-per-ounce mark.

What Is De-dollarisation?

De-dollarisation refers to the process by which countries and financial institutions reduce reliance on the US dollar in global trade, reserves, and financial contracts — shifting toward other currencies, assets like gold, or alternative payment systems.

Historically the dollar has been dominant since the Bretton Woods era, but its share in global reserves has declined from about 71% in 1999 to around the lowest in 30+ years recently.

US policies and their effect on the dollar:

• Trade tensions, tariffs & sanctions: Trump’s aggressive use of tariffs and threats including extreme tariff talk on BRICS nations and confrontations with European countries has intensified geopolitical friction, eroding confidence among some investors and policymakers about reliance on the dollar. His confrontational rhetoric, such as threatening a Greenland seizure, has even led some institutional investors, like Danish pension funds, to divest from US Treasury bonds, a traditional dollar-based safe asset.
• Policy uncertainty: Morgan Stanley and other analysts highlight that policy uncertainty around debt, sanctions, and governance under Trump is influencing foreign central banks and investors to reconsider dollar dominance, and they believe these uncertainties could slightly accelerate the shift away from the dollar, although no outright collapse is expected.

• Weakening dollar value: In 2025, the US dollar weakened significantly, declining by about 9%, which made it less attractive relative to other assets, and a softer dollar often boosts commodities priced in dollars, including gold, because it becomes cheaper for buyers using other currencies.

Rationale behind the surge in gold:

Safe-haven demand amid global uncertainty: Gold prices have surged to record highs primarily because investors are seeking safe-haven assets in response to rising geopolitical tensions, trade policy uncertainty, and broader economic instability, which increases demand for gold as a reliable store of value.

Weakness of the US dollar: A weakening US dollar makes gold — which is priced in dollars — cheaper for holders of other currencies, boosting global demand and contributing to higher gold prices.

Central Bank buying and diversification: Central banks around the world are increasing their gold reserves as part of a strategy to diversify away from dollar-denominated assets, strengthening gold’s price by adding structural demand.

Expectations of lower interest rates: Speculation about future interest rate cuts — especially if central banks like the US Federal Reserve adopt looser monetary policy — reduces the opportunity cost of holding non-yielding assets like gold, making it more attractive.

Impact of the de-dollarisation trend and the rising gold price on the Reserve Bank of India’s (RBI) management of foreign assets:

Diversification of reserve composition: The RBI has been strategically reducing its holdings of US Treasury securities — which are dollar-denominated assets — to diversify its foreign exchange reserves, with US Treasuries falling to multi-year lows as a share of total reserves.

Strengthening financial stability and risk management: By reallocating from US dollar assets to gold, the RBI is reducing exposure to potential valuation losses that can occur when bond yields rise or when political and economic tensions weaken confidence in the dollar.

Boost to overall reserve valuation: The sharp rise in global gold prices has significantly increased the value of RBI’s existing gold holdings, contributing to overall reserve growth even without proportionally large new gold purchases.

Support for currency management: Selling some US dollar assets has provided the RBI with funds that can be used to support the Indian rupee in the foreign exchange market, particularly when the rupee faces downward pressure against the dollar.

Conclusion:

The shift toward de-dollarisation and the global surge in gold prices have prompted the RBI to rebalance its foreign asset management strategy by diversifying away from excessive dependence on dollar-denominated assets and increasing gold holdings. This approach strengthens reserve stability, reduces currency and geopolitical risk, and enhances the resilience of India’s external sector in an increasingly uncertain and multipolar global financial environment.

Source: Indian Express