Euro is back on the scene for global central banks

While an energy shock and war in Europe has hurt the euro, the U.S’ rivalry with China and fallout from Russia’s war in Ukraine fuelled the talk of diversification away from the dollar.

Once hurt by crises and deflation, the euro is gaining popularity among central bank reserve managers on a return to positive rates and geopolitics challenging dollar’s appeal.

About one in five of the 75 central banks surveyed by the London-based OMFIF think-tank anticipate increasing euro holdings over the next two years, its recently-published 2023 report showed.

While 7% looked to cut euro holdings, net demand was higher than for any other currency during the period and a jump from the 2021 and 2022 surveys of reserve managers controlling almost $5 trillion.

Shifts can take years to play out. The dollar, which makes up 60% of global reserves versus the euro’s 20%, will not lose its crown overnight.

Yet, a more positive euro outlook speaks to notable changes taking place.

For starters, the European Central Bank’s exit from negative interest rates in 2022 drove euro area government bond yields higher after almost a decade below 0%, and they should remain elevated even as rate cuts near.

Germany’s 10-year Bund yield has stayed above 1.9% since late 2022.