China and other economies reducing US Treasury exposure, boosting gold, and seeking alternatives to dollar assets

The international monetary system’s realignment accelerated sharply in mid-2026, as key global players intensified their historic shift away from U.S. Treasuries toward euros, gold, and alternative local-currency assets. This transformation, rooted in deepening geopolitical fragmentation, mounting fiscal pressures, and evolving regulatory frameworks, is reshaping the global financial architecture toward a more multipolar, fragmented, and technologically complex order.

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Escalation of Reserve Diversification: China and Emerging Markets Deepen Their Shift

China’s People’s Bank of China (PBOC) remains at the forefront of reducing U.S. Treasury exposure. In the first half of 2026, China further curtailed its Treasury holdings, reallocating capital aggressively into euros and gold:

• Gold reserves rose by an additional 4%, pushing China’s holdings closer to historic peaks as gold prices remained elevated near $5,200 per ounce. This reflects a strategic move to hedge against dollar depreciation and geopolitical risks.
• Euro-denominated assets surged, energized by the European Central Bank’s (ECB) expanded liquidity swap network now encompassing nearly all major Asian and Latin American central banks. This expansion has markedly increased euro liquidity line utilization, signaling a robust bid for alternatives to dollar funding amid intensifying sanctions and trade frictions.
• Emerging markets broadly mirrored this trend:
  • India slashed its U.S. Treasury holdings by 7%, simultaneously boosting gold purchases.
  • Uzbekistan’s reserves now comprise over 87% gold, underscoring a near-complete pivot to precious metals.
  • Türkiye’s official gold reserves climbed to nearly $230 billion, emblematic of regional efforts to insulate against monetary fragmentation.

These shifts are part of a broader global pattern: according to the World Gold Council, central banks worldwide purchased a record 650 tons of gold in 2025, sustaining this momentum well into 2026. The sustained appetite for gold signals enduring concerns over the dollar’s reliability as a reserve asset.

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Europe’s Strategic Euro Internationalization Gains Steam

Europe is seizing the opportunity created by dollar vulnerabilities to elevate the euro’s global stature:

• The ECB’s expanded euro liquidity swap network now links virtually every significant foreign central bank, facilitating smoother euro funding access during episodes of dollar liquidity stress.
• Utilization rates of these swap lines have risen steadily, as central banks in Asia and Latin America increasingly depend on euros amid fragmented dollar funding caused by U.S. sanctions and mounting geopolitical tensions.
• European policymakers, including Bundesbank President Joachim Nagel, have publicly underscored the risks of overreliance on the dollar, pointing to sanctions and trade restrictions that disrupt dollar flows worldwide.
• A joint IMF-ECB report published in February 2026 highlighted the euro’s growing strategic importance as a monetary sovereignty tool, while also cautioning against challenges posed by high euro area debt and complex monetary policy coordination.
• Complementary WTO initiatives encouraging China to moderate trade surpluses align with Europe’s push for a more balanced and multipolar trade environment supportive of euro internationalization.
• Recent analyses emphasize Europe’s resilience amid U.S.-China trade frictions, underscoring the continent’s expanding role in shaping global economic governance and monetary order.

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Intensifying Strains on the U.S. Treasury Market Amid Record Global Debt

The U.S. Treasury market, long the cornerstone of global finance, is under heightened strain amid unprecedented fiscal and supply-side pressures:

• The 10-year Treasury yield climbed to 4.3%, reflecting record government bond issuance and ongoing fiscal deficits.
• Treasury auction demand weakened further, with bid-to-cover ratios falling to near historic lows of 2.1x, signaling reduced appetite from both foreign and domestic investors.
• Goldman Sachs projects a daunting $2.3 trillion gross Treasury issuance in 2026, compounding looming supply pressures ahead of a $9.5 trillion maturity wall in 2027.
• The Institute of International Finance (IIF) reported that global debt hit a record $348 trillion in 2025, largely driven by government spending, reinforcing the fiscal stress underpinning Treasury market challenges.
• Recent U.S. Supreme Court rulings invalidating over $175 billion in tariff revenue have injected fresh uncertainty into fiscal projections, exacerbating concerns about sustainable debt financing and triggering what some market observers call “$30 trillion bond-market angst.”
• The Congressional Budget Office projects a $2.1 trillion deficit for 2026 and structural deficits averaging 4.8% of GDP over the next decade, with debt interest payments expected to reach $2 trillion by 2036 — surpassing current defense expenditures and highlighting an unsustainable trajectory.
• Regulatory reforms by the SEC mandating central clearing for Treasury cash and repo trades by mid-2027 have increased capital and liquidity costs for market intermediaries, contributing to shrinking Treasury holdings by banks and deteriorating market liquidity.
• Economists describe a “liquidity paradox,” where “ample bank reserves coexist with constrained Treasury market liquidity,” with notable voices like Raghuram Rajan summarizing the situation as “liquidity everywhere, but not a drop to use.”
• Research from the Andersen Institute details a “quiet repricing” of Treasury risk amid geopolitical fragmentation and reserve diversification, as evidenced by the 10-year/10-year forward Treasury yield rising to 5.62273%, an increase of over half a percentage point.
• Morningstar Nordics warns that recent interest rate cuts by other global central banks could destabilize long-term government bond markets worldwide, risking a broader government debt repricing crisis.

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IMF Inflation Outlook and Federal Reserve Policy: Prolonged Tightening and Fiscal Risks

The IMF’s mid-2026 update further complicates the U.S. monetary landscape and Treasury market outlook:

• The Fund revised its inflation forecast, projecting that U.S. inflation will not return to the Federal Reserve’s 2% target until 2027, delaying expectations of monetary easing.
• This implies that the Fed’s policy rate will remain near or above neutral for an extended period, maintaining higher borrowing costs and pressuring Treasury valuations.
• The prolonged tightening cycle incentivizes global central banks and investors to accelerate diversification away from dollar assets, reinforcing the ongoing “$13 trillion shift” in reserve portfolios.
• IMF officials issued urgent calls for credible and timely U.S. fiscal consolidation to maintain investor confidence and safeguard global financial stability, warning that unchecked debt growth poses systemic risks.

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Structural and Technological Underpinnings of Monetary Evolution

Beyond immediate market dynamics, several deeper forces are reshaping the international monetary system:

• Geopolitical rivalries and policy fragmentation increasingly disrupt global trade and finance, prompting central banks to prioritize bilateral local currency swap lines and alternative reserve assets to reduce dollar dependency.
• Research from Banca d’Italia identifies a “silent monetary regime shift” driven by artificial intelligence and technological advances that alter productivity, inflation expectations, and neutral interest rates, complicating monetary policy and reducing demand for traditional reserve assets.
• The Brookings Institution critiques the Federal Reserve’s ample reserves framework, highlighting unintended adverse effects on Treasury market liquidity and calling for structural reforms.
• The Centre for Economic Policy Research (CEPR) underscores vulnerabilities in cross-border capital flows amid geopolitical tensions and the realignment of global financial centers, accelerating fragmentation of dollar funding and reserve diversification.
• The European Money and Finance Forum (SUERF) emphasizes that bilateral local currency swap lines and rising alternative reserve assets are transforming liquidity channels, signaling a profound and silent monetary regime shift influenced by innovation, trade realignment, and evolving policies.

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Monitoring Indicators in a Rapidly Changing Monetary Landscape

Key indicators to watch as the international monetary system evolves include:

• Central bank reserve composition changes, particularly shifts away from U.S. Treasuries toward euros and gold.
• Treasury auction metrics such as bid-to-cover ratios, yield curve dynamics, and liquidity conditions.
• Progress and market effects of SEC-mandated clearing reforms on Treasury cash and repo markets.
• Utilization rates of ECB euro liquidity swap lines as a gauge of euro internationalization.
• Central bank gold purchases and price trends indicating safe-haven demand and diversification.
• Developments in trade and sanctions policies, including WTO rulings and tariff disputes affecting dollar flow fragmentation.
• Advances in AI-driven macro-financial research illuminating systemic shifts in reserve asset demand and monetary policy frameworks.

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Conclusion: Navigating Toward a Fragmented, Multipolar Monetary Future

Mid-2026 stands as a pivotal moment in the international monetary system’s historic transformation. China and emerging markets are accelerating their retreat from U.S. Treasuries, while central banks globally sustain record gold acquisitions. Europe’s strategic expansion of euro liquidity networks and policy advocacy bolster the euro’s global role amid mounting stresses on the dollar.

Compounding these shifts, the IMF’s delayed inflation outlook and extended Federal Reserve tightening cycle intensify pressures on Treasury markets, underscoring the urgent need for credible U.S. fiscal consolidation. The sweeping “$13 trillion shift” in reserve allocations crystallizes the scale and urgency of this transition toward a more fragmented, multipolar, and technologically driven financial architecture.

While the U.S. Treasury market’s depth currently absorbs immediate shocks, a “quiet repricing” of risk is underway amid fragmented dollar flows, rising yields, and evolving reserve preferences. Successfully navigating this new landscape demands nimble fiscal and monetary policies, innovative debt and liquidity management, regulatory agility, and reinforced multilateral cooperation.

Absent decisive and coordinated action, the dollar’s primacy faces unprecedented and potentially enduring challenges—heralding a fundamental redefinition of international financial relations for decades to come.