By Libby George

LONDON, June 30 (Reuters) – More of the world’s central banks plan to cut dollar allocations than increase them in the coming decade as political risks associated with the U.S. currency rise, an OMFIF survey of public investors released ‌on Tuesday showed.

It is the first time the survey, carried out by the Official Monetary and Financial Institutions Forum, has found ‌such a shift away from the dollar.

The findings dovetail with a global debate about the U.S. dollar’s role as the primary reserve currency that has been stoked by U.S. ​policy uncertainty and heightened geopolitical risks.

The London-based thinktank set up in 2010, also found an eagerness among the 90 central banks, public pension funds and sovereign funds surveyed to significantly increase the use of AI from current levels.

Survey participants, who collectively oversee some $10 trillion in assets, increasingly viewed volatility as a permanent feature and are testing new approaches to dealing with it, including applying AI to the problem.

“The old assumption that public investors can wait for ‌the environment to normalise looks increasingly unrealistic,” OMFIF ⁠senior economist Yara Aziz wrote in the report.

WANING DOLLAR AND GLITTERING GOLD?

There is no clear alternative to the dollar and it has rallied 3% this year, driven by higher U.S. interest rates, a thirst for U.S. assets ⁠and a flight to safety sparked by the U.S.-Iran war.

However, some 79% of central banks, and 60% of public funds, believe the global monetary system is transitioning towards a “multipolar” world.

Currencies other than the top eight are gradually gaining ground among reserve assets. Central banks have sought to increase Norwegian crown and New ​Zealand dollar ​allocations and have also increased their interest in sterling.

While survey respondents also maintained ​their intentions to increase euro and Chinese renminbi holdings, ‌they said structural challenges held back both currencies.

Still, nearly all of those surveyed viewed the yuan as an effective portfolio diversification.

Gold, which has hit a series of record high prices and is held by 82% of central banks, “has moved to the centre of reserve management strategy,” the survey found.

In the short term, it is the asset in which central banks plan most to increase holdings, with a net 30% of respondents intending to boost their allocation over the next one to two years.

QUEST TO INCREASE AI USE

The use of AI is also increasing. More than 66% ‌of central banks plan to increase AI integration in the near term, the ​report showed. Not a single advanced economy central bank and just 9% of central banks overall ​reported being content with current usage.

Banks are mainly using AI ​for data analysis and back-office functions. But there is a divide, with more than 89% of central banks ‌in developed economies using AI compared with 44% in emerging ​markets.

Among public funds, demand for physical ​assets such as infrastructure and real estate outstripped other assets, with nearly 60% planning to increase allocation in the next one to two years.

The survey also showed a perception shift towards emerging markets, with 38% of global public funds planning to increase allocation to ​emerging economies, up from last year’s 27%.

Interest in ‌increasing emerging market allocation outstripped demand for increasing allocation to developed economies, which fell to 25% from last year’s 47%.

The ​most attractive markets were the United States and China, in part driven by their role in the AI boom, the ​survey showed.

(Reporting by Libby George; Editing by Dhara Ranasinghe and Barbara Lewis)