US Dollar Remains Dominant, But Gold Gains Ground as Safe-Haven Asset

COLOMBO (News 1st) - Growing geopolitical tensions, market uncertainty, cyber threats, and recurring global crises are forcing institutions around the world to rethink how they manage reserves and liquidity, according to Domenico Nardelli of the Asian Infrastructure Investment Bank (AIIB), who warned that even the strongest financial frameworks are only "one shock away" from being tested.

Addressing the Central Bank of Sri Lanka's inaugural Resource Management Conference, Nardelli said the current global environment demands larger liquidity buffers than in the past, as the speed and frequency of unexpected disruptions continue to increase.

"In the current market and geopolitical situation, you probably have to hold more liquidity than we were used to before," he said.

According to Nardelli, recent years have demonstrated that crises can emerge from multiple directions, ranging from geopolitical conflicts and cyberattacks to sudden capital outflows and operational disruptions.

"However strong your liquidity policy, it is always one shock away from being tested. And when the unexpected happens, it tends to happen fast."

He stressed that such events are becoming an increasingly common feature of the global economic landscape.

"Unexpected means many things in the context we are discussing. It can be accelerated cash outflows, it can be significant operational incidents, including cyber risks or cyberattacks, geopolitical conflicts. In a word, a crisis."

Highlighting the importance of liquidity during turbulent periods, Nardelli drew parallels between modern financial challenges and one of history's most famous banking collapses.

Recalling events in 14th-century Florence, he spoke of the powerful Bardi and Peruzzi banking families, which were among Europe's leading financial institutions at the time.

According to Nardelli, the two banking houses extended large loans to the English monarchy during the Hundred Years' War, expecting repayment once the conflict ended. However, as the war dragged on and debts went unpaid, both institutions eventually collapsed, triggering economic hardship across Florence and its surrounding regions.

"A great depression followed for more than a decade around Florence and the surrounding area," he noted.

The AIIB official said the centuries-old story illustrates a lesson that remains relevant today: financial institutions can never underestimate the importance of maintaining sufficient liquidity and resilience against unexpected shocks.

Turning to the current global financial system, Nardelli rejected suggestions that the US dollar is on the verge of losing its dominant role in international finance.

"The US dollar remains the dominant reserve currency," he said.

He pointed out that US Treasury markets continue to be among the deepest and most liquid financial markets in the world and remain central to the functioning of the international monetary system.

"The international financial system remains deeply anchored in dollar liquidity."

Nardelli noted that although the dollar's share of global foreign exchange reserves has gradually declined over time, it still accounted for approximately 57% of official global reserves during the first quarter of 2026.

With global official foreign exchange reserves estimated at approximately US$13 trillion, he said the need for highly liquid assets continued to support the dollar's importance in reserve management.

Despite ongoing debate about de-dollarization, Nardelli argued that investors are not abandoning the world's reserve currency. Instead, they are increasingly focused on diversification.

"Global investors, instead of rushing to abandon US dollar assets, are looking to improve one key feature in their portfolio, and this is diversification."

He observed that geopolitical uncertainty is encouraging investors to spread their risk across multiple asset classes and jurisdictions rather than concentrating exposure within a single market.

"In today's world, with the rise of geopolitical conflict, why would you want to tie your assets to one single jurisdiction given the possibility of those assets being impacted by an increasingly volatile geopolitical climate?"

Nardelli said the growing fragmentation of the global economy has strengthened the case for diversified reserve portfolios, particularly among central banks, sovereign wealth funds, and institutional investors managing multi-currency portfolios.

"In theory, the more fragmented the geopolitical environment becomes, the stronger the case for more diversification."

However, he cautioned that diversification should not be viewed as a risk-free strategy.

"We should be mindful that diversification also has a cost."

Among the assets benefiting most from this search for diversification is gold, which Nardelli described as one of the most attractive safe-haven assets in times of uncertainty.

"Gold has intrinsic value," he said.

He noted that unlike many financial assets, gold does not depend on the creditworthiness of any government or institution and can therefore act as a form of insurance during periods of geopolitical instability and market turmoil.

"Gold can be viewed as insurance for any portfolio in almost any market situation, particularly when conflicts and uncertainties are on the rise."

Amid growing global tensions and continuing market volatility, Nardelli said gold's appeal to investors is likely to remain strong.

"I believe we may not have seen the peak in gold prices yet."