UBS AM survey flags stagflation and dollar diversification

Persistent inflation and rising long-term yields have displaced geopolitics as the dominant concern for central bank reserve managers, according to UBS Asset Management's (UBS AM) 32nd Reserve Manager Survey, released following this week's annual Reserve Management Seminar (RMS) in Wolfsberg, Switzerland.

This event is one of the industry's longest-running and most successful gatherings for sovereign institutions, to which representatives from more than 50 institutions have attended. The annual UBS Reserve Manager Survey collated unique insights from about 30 leading central banks at a time of geopolitical, economic and structural challenges to the investment landscape.

Commenting on this year’s RMS event, Massimiliano Castelli, head of strategy and advice, Global Sovereign Markets at UBS Asset Management, said: “The biggest change this year is that inflation and rising long-term yields have moved back to the centre of concerns. For reserve managers, these are now the dominant macro risks, surpassing geopolitical factors. Reserve managers have growing concerns about the long-term outlook for the US dollar, but there is still no credible alternative that can fully replace it as the anchor of the global system. We are moving slowly towards a more multipolar currency system. The euro and renminbi stand out as the main beneficiaries of ongoing diversification trends.”

Key highlights include:

Macro and economic outlook: Stagflation the most likely scenario

In terms of the main risks that the global economy is currently facing, persistent inflation and/or uncontrolled rise in long-term yields moved back to the centre of concern, according to 82% of reserve managers. Geopolitics remains highly relevant, with a further escalation of military conflicts ranking as the second-highest global risk, at 75% this year (compared to 51% in last year’s survey). Trade war escalation, which was seen as the top risk by reserve managers in the previous year, with 74%, declined noticeably to 18%.

There is increased pessimism when it comes to the economic outlook, with stagflation considered to be the most likely economic scenario over the next five years, according to 52% of survey respondents, a noticeable increase from 39% in the previous year.

In addition, 79% believe that we have entered a period of higher inflation that will persist for a longer period of time (63% in 2025). About 82% of the respondents cited rising US rates and inflation as the main concern when it comes to the investment of FX reserves.

Only 14% believe that the US will have experienced a technical recession (two or more quarters of negative growth) or worse by June 2027, compared to 43% in last year’s survey.

Currency management: ongoing diversification and the acceleration of RMB internationalisation

While 93% of the respondents believe that the USD will not lose its status as a safe haven currency over the next few years (up from 79% last year), however, 61% believe that the demand for both US debt and US dollar will stagnate with yields gradually rising.

In addition, 63% expect a weakening of the USD, either via agreements or unilaterally, while 33% see US debt restructuring as a possible scenario over the coming year.

Although average USD holdings increased to 59% (slightly up from 56% in the previous year), the US dollar was the most frequently mentioned currency that participants had reduced over the course of the previous year on a net basis. About 42% of the respondents indicated that they reduced or plan to reduce their exposure to US assets, up from 29% last year.

The renminbi and euro stand out as the main beneficiaries of ongoing diversification trends, with 63% (59% in 2025) of the respondents said RMB is most likely to benefit from macroeconomic and geopolitical shifts over the next five years, and 56% for the EUR (74% in 2025). Gold remains the clear winner with 81%.

Looking at the year ahead, RMB （42%） stands out when it comes to currencies that central banks are planning to add on a net basis, followed by commodity currencies like the Canadian Dollar.

Around 44% of the respondents think that the ongoing US-China relations accelerated the internationalisation trend of the RMB, a noticeable increase from 30% in the previous year.

The report showed 63% of survey respondents answered that they are invested, or consider investing in RMB, an increase from 61% in the previous year. One institution indicated that it introduced the RMB as a new currency in its reserves.

The US and geopolitics under Trump 2.0

Reserve managers see persistent pressure on the institutional and political foundations underpinning the US dominance in global asset allocation: 63% worry about a decline in US social cohesion, 52% see Fed independence is at risk, and 37% see a risk for Data quality/independence and government transparency.

More than half (56%) of respondents believe Kevin Warsh’s appointment as the new Fed chairman has somewhat weakened Fed independence.

About 44% expect the Fed to become somewhat more dovish, while 37% expect no material change in the overall Fed policy stance (15% somewhat more hawkish). Around 68% expect the US headline consumer price index (CPI)  to end up in the 3% to 4% range in a year, and 64% expect the Fed policy rates to remain broadly at current levels （3% to 4%） in one year (June 2027). It reported that 54% of reserve managers expect a further deterioration in the US/European transatlantic relationship, but at the same time, 68% see no fundamental change in the relation between the US and North Atlantic Treaty Organization (NATO).

Asset allocation: Diversification is key

Overall, reserve managers have become more active, with 81% of participants altering their strategic asset allocation over the past 12 months, significantly higher than 59% in 2025, reflecting a clear shift in the investment environment.

Demand for gold and inflation-protected bonds remains strong, reflecting their role as macro hedges in a more uncertain geopolitical environment. While 29% of participants see gold as the best-performing asset class over the next five years, it is a noticeable decline from 67% in 2025. Passive equity has reached a 48% eligibility rate as an asset class among central banks, while 35% plan to increase their allocations on a net basis over the coming year, up from 12% last year.

In terms of asset classes, developed markets (DM) and emerging markets (EM) equities are expected to be the best performers over the next five years in risk-adjusted terms. US equities, particularly the “Magnificent 7” technology stocks, are seen as the strongest outperformers, reflecting strong conviction in the AI-driven transformation. While gold has lost its top position from last year, it is still expected to outperform government bonds and cash, supported by longer-term macroeconomic and geopolitical trends.

Cryptocurrencies still ranked third with 44% in the previous year, but declined to 11%.

Concluding this year’s survey findings, Castelli said: “Despite a cautious macro outlook, portfolios still reflect selective risk-taking. Reserve managers are not stepping back from markets, but they are repositioning within them. Geopolitics remains a critical driver of uncertainty, but the focus has broadened. It is no longer just about conflicts – it is about how geopolitical tensions translate into inflation, yields and financial fragmentation. What we hear from reserve managers is not panic, but strategic concern. They are increasingly factoring geopolitical developments into long-term asset allocation decisions, not just short-term risk management.”

Re-disseminated by Wealth and Society