Israel-Iran conflict highlights dollar’s tarnished safe-haven appeal: McGeever

ORLANDO, Florida – A dramatic spike in the potential for all-out war between Israel and Iran would typically be expected to spark an immediate and strong rally in the US dollar, with investors seeking the safety and liquidity of the world’s reserve currency.

That didn’t happen on Friday.

The dollar’s response to Israel’s strikes on Iranian nuclear facilities and military commanders, followed by Tehran’s initial threats and retaliation, was pretty feeble. The dollar index, a measure of the currency’s value against a basket of major peers, ended the day up only around 0.25%.

To be sure, the dollar fared better than US stocks or Treasuries, which both fell sharply on Friday. But with oil surging over 7% and gold up a solid 1.5%, a strong ‘flight to quality’ flow would have lifted the dollar more than a quarter of one percent.

The US currency’s move was particularly weak given the dollar’s starting point on Friday. It was at a three-and-a-half year low, having depreciated 10% year to date, with sentiment and positioning heavily bearish. Yet a significant geopolitical shock generated barely a knee-jerk bounce.

For comparison, the dollar rose more than 2% in both the first week of the 2006 Israel-Lebanon War and in the week following Israel’s invasion of Southern Lebanon last year.

The dollar’s weak response to this latest Middle East conflict supports the narrative that investors are now reassessing their high exposure to dollars, in light of some of the unorthodox policies put forward by US President Donald Trump in recent months.

The dollar was down slightly early on Monday, and gold and oil were giving back some of Friday’s gains too, as markets regained a foothold at the start of a busy week packed with key central bank meetings.

PAINED SMILE

The dollar has historically been one of the best hedges against short-term volatility sparked by geopolitical risk, behind gold and on a par with oil, according to research published last year by Joe Seydl, senior markets economist at JP Morgan Private Bank.

Indeed, a Journal of Monetary Economics paper from last year stated plainly, “The dollar is a safe-haven currency and appreciates when global risk goes up,” a trend resulting from the “fundamental asymmetry in a global financial system centered around the dollar” built up over the course of several decades.

That latter part of that argument hasn’t changed.

The dollar accounts for almost 60% of the world’s USD 12 trillion FX reserves, with its nearest rival, the euro, accounting for around 20%. Almost two-thirds of global debt is denominated in dollars, and nearly 90% of all FX transactions around the world has the greenback on one side of the trade.

That means traders, financial institutions, businesses, consumers and governments still need to be more exposed to dollars than any other currency, even if they question the direction of current US policy.

However, the dollar’s downside ‘structural’ risks are growing, analysts at Westpac noted on Sunday, as concern over Washington’s fiscal health and policy uncertainty erode the dollar’s ‘safe-haven identity’. Investors are now looking to hedge their large dollar exposure more than ever.

If this dampens their instinctive demand for dollars in periods of sudden geopolitical tension, uncertainty and volatility, then the so-called ‘dollar smile’ theory could be challenged.

This ‘smile’ is the idea that the dollar appreciates in periods of financial market stress as well as in ‘risk on’ periods of strong global growth and investor optimism, but sags in between. This idea was first outlined over 20 years ago by then currency analyst and now hedge fund manager Stephen Jen.

If the Israel-Iran conflict continues to escalate, that dollar smile could get rather lopsided.

(The opinions expressed here are those of the author, a columnist for Reuters)

(By Jamie McGeever; Editing by Chizu Nomiyama)

Japan bourse’s activist clash is a welcome sign

HONG KONG – By the standards of sharper-elbowed markets, the recent dust-up between activist investor Strategic Capital and the Tokyo Stock Exchange is positively mild. For Japan’s historically sleepy stock market, however, it’s a sign of progress for what remains a relatively young and underdeveloped activist ecosystem.

The short version of the clash, reported on June 9 by news outlet Toyo Keizai, goes like this: until recently, if a foreign investment fund held more than 10% of a Japanese stock and didn’t file paperwork confirming itself as having multiple backers, the exchange considered those holdings illiquid. Tokyo-based Strategic Capital built up a stake of over 10% in Osaka Steel 5449.T via its own foreign fund, but chose not to file said paperwork.

That pushed the free float of the Nippon Steel subsidiary below the threshold to remain listed, putting pressure on the parent to acquire the “child” listing and lining up a nice payout for Osaka Steel’s minority shareholders.

The gambit looked pretty clever until April 23, when the bourse issued guidance stating such shares would now be considered liquid by default, even without the paperwork. Cue an announcement from Osaka Steel that its free float suddenly met the minimum — and frustration from Strategic Capital, which penned a letter of complaint to the stock exchange.

It is still early days for activism in Japan, which makes such conflicts valuable in setting ground rules and expectations. The upshot of this spat for market participants is twofold: for one, the specific tactic deployed on Osaka Steel won’t work in the future, and more generally, the bourse probably won’t look favorably on activists trying to force delistings via a technicality.

Yet Osaka Steel, which trades at just 79% of book value, per LSEG, looks very much like the sort of underperforming “child” listing the exchange says it wants done away with. If it makes a habit of scotching activist strategies at will, the bourse risks undermining its broader strategy of using market forces to push listed groups to streamline governance and boost returns.

On its own, however, the recent move looks unlikely to do serious damage. Pressure from activists has already helped spur record year-to-date share buybacks of more than 12 trillion yen, according to figures from Nomura. And with a record 50 Japanese companies facing activist proposals this earnings season, per Nikkei Asia, there will be plenty of action in the coming weeks. Expect more wrinkles to get ironed out as the parties involved hammer out where the lines are. All for the better.

CONTEXT NEWS

Strategic Capital, a Tokyo-based activist investor, penned a letter of complaint to the Tokyo Stock Exchange after guidelines announced by the bourse in late April changed how it determined the liquidity of shares held by foreign investment funds, Japanese business magazine Toyo Keizai reported on June 9.

The change recategorized a stake of over 10% in Osaka Steel held by Strategic Capital via a foreign investment fund as liquid, pushing the free float of the Nippon Steel subsidiary back above the 25% threshold to remain listed on the exchange’s Standard Market.

(Editing by Antony Currie; Production by Ujjaini Dutta)

US yields rise as markets react to Middle East conflict

US Treasury yields rose Friday afternoon, on track to snap a four-day losing streak after Israel’s strike on Iran shocked markets, pushing oil prices higher and pressuring stocks.

Israel struck Iranian targets on Friday for a second night in what it said was a move to block Tehran from developing nuclear weapons.

The attack on multiple targets sparked a surge in oil prices and rekindled inflation concerns, which overshadowed economic and trade news earlier in the week that boosted demand for US sovereign debt and pushed yields lower.

Consumer data from the University of Michigan also showed an unexpectedly large jump in sentiment and expectations. However, markets appeared to show little interest in light of the unfolding violence in the Middle East.

Earlier in the week, yields had fallen on cooler-than-expected consumer inflation data, reported progress in reaching a detente in US-China trade relations and signs of deepening weakness in the US labor market.

Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, said that rather than a typical flight to safety in US sovereign debt, the rising yields instead pointed to markets better positioned to absorb an outburst of violence in the Middle East.

When Iraqi leader Saddam Hussein invaded Kuwait in 1990, for example, the United States was in recession and oil supplies were tighter, he said.

“But when you’re in a world that’s already seen a fair amount of geopolitical and military activity in that region and elsewhere, and the economy’s on a fairly good footing with a good oil supply, the market is less susceptible,” said Tipp.

Investors in the coming week will turn their eyes to the next policy announcement from the Federal Reserve, but futures currently predict the central bank will not cut rates before September.

The yield on the benchmark US 10-year Treasury note was last up 6.7 basis points to 4.424%, nevertheless leaving it down about 8 basis points for the week.

The yield on the 30-year bond rose 7.2 basis points to 4.915%, down about 4 basis points since the prior week.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 46.4 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, rose 5 basis points to 3.956%, leaving it down nearly 14 basis points for the week — the biggest weekly decline since mid-April.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.320% after closing at 2.284% on June 12.

The 10-year TIPS breakeven rate was last at 2.294%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Douglas Gillison in Washington; additional reporting by Davide Barbuscia in New York; Editing by Paul Simao and Lisa Shumaker)

Investors unnerved as Israel-Iran conflict fuels oil market rally

NEW YORK/GDANSK – Investors were on edge as financial markets reopened on Sunday, with crude oil prices initially up near 4% as markets were gripped by the escalating threat of a sweeping conflict in the Middle East. US stock futures opened marginally lower.

Israel and Iran launched fresh attacks on each other on Sunday, killing and wounding civilians and raising concerns of a broader regional conflict, with both militaries urging civilians on the opposing side to take precautions against further strikes. Yemen’s Iran-aligned Houthis joined the fray.

Images from Tehran showed the night sky lit up by a huge blaze at a fuel depot after Israel began strikes against Iran’s oil and gas sector – raising the stakes for the global economy and the functioning of the Iranian state.

“The market is very headline-driven and short-term focused, so there’s just a lot of volatility over the near term,” said Kathryn Rooney Vera, chief market strategist at StoneX Group.

Brent crude futures prices added just under 4% to trade near USD 76.94 after resuming trading on Sunday, having risen 7% on Friday as Israel and Iran first traded strikes. They later pared gains to trade up USD 2.14 at USD 76.37.

“It is noteworthy that while the Israelis have attacked Iran’s natural gas processing facility, which fuels its power grid, it hasn’t as of now hurt its oil export facilities,” said Eric Beyrich, portfolio manager at Sound Income Strategies. Of the early market moves, he said “this could all change as the day unfolds.”

Israel’s air offensive against Iran that began early on Friday, killing commanders and scientists and bombing nuclear sites in a stated bid to stop Tehran from building an atomic weapon, knocked risky assets including stocks, on Friday. It also lifted oil prices and prompted a rush into gold and the dollar, which resumed its role as a safe-haven asset for the first time in months.

Rallying oil prices pose a risk to the inflation outlook, as central banks around the world grapple with the impact on prices from Trump’s trade tariffs and the effect on economic growth.

Rooney Vera at StoneX said she was worried about possible supply restrictions in case of a closure of the Strait of Hormuz, a narrow shipping lane between Iran and Oman. Any closure could restrict trade and further impact global oil prices.

“That could worsen inflationary pressures,” she said.

Investors are skittish, and the S&P 500 appears to have stalled after rallying about 20% from its trade war-induced April low to near-record highs. Futures opened slightly lower on Sunday, with S&P 500 futures down 0.2% early in the overnight session.

“The equity market will breathe somewhat of a sigh of relief that Iranian military muscle is not at the level that some of us feared,” said Jack Ablin, chief investment officer of Cresset Capital.
Meanwhile, protests, organised by the “No Kings” coalition to oppose Trump’s policies, and the assassination of a Minnesota state lawmaker on Saturday, added to downbeat sentiment.

“It’s more of an oil story than an equity story at this point,” said Jim Carroll, senior wealth adviser and portfolio manager at Ballast Rock Private Wealth. “Stocks right now seem to be hanging on.”

The Cboe Volatility Index, often called the Wall Street “fear index,” finished at 20.82 on Friday, its highest close in three weeks.

(Reporting by Suzanne McGee, Saqib Iqbal Ahmed and Davide Barbuscia in New York, and Linda Pasquini in Gdansk; Editing by Alden Bentley, Richard Chang, Amanda Cooper, Susan Fenton, and Matthew Lewis)

Fed meeting in focus as investors seek rate-path hints

NEW YORK – The Federal Reserve’s balancing act between concerns about a weakening labor market and still above-target inflation will take center stage for investors in the coming week as they weigh risks to the rally in the US stock market.

The benchmark S&P 500 has rebounded sharply over the past two months as worries about the impact of trade barriers on the economy have eased since President Donald Trump’s “Liberation Day” announcement on April 2 sent the market plunging.

The rally hit a stumbling block on Friday as stocks fell globally and investors moved to safe-haven assets after Israel launched a military strike on Iran, and Iran fired missiles in response. Major US indexes ended down over 1% on Friday, with the S&P 500 falling 1.1%.

The Fed’s two-day monetary policy meeting could present the next major obstacle for markets. While the US central bank is widely expected to hold interest rates steady when it announces its decision on Wednesday, investors are eager for any hints about whether the Fed might be poised to lower rates in the coming months.

The fed funds rate has been at 4.25%-4.50% since the central bank last eased in December, by a quarter percentage point.

“What the Fed is going to have to try to do next week is encourage the belief that they are able to act without actually promising anything,” said Drew Matus, chief market strategist at MetLife Investment Management. “If they move rates lower too early before there is evidence that there is weakening in the economy that they can then point to, they raise the risk of actually boosting inflation expectations further.”

At its last meeting in May, the central bank said risks of both higher inflation and unemployment had risen. The Fed has a dual mandate to maintain full employment and price stability, and investors will be seeking any signs of whether officials are more concerned about one of those goals and what that means for the path of rates.

One area of focus on Wednesday will be an update to Fed officials’ projections about monetary policy and the economy, which were last published in March.

Larry Werther, chief US economist of Daiwa Capital Markets America, will be watching estimates for unemployment. While the Fed officials’ last projection was for unemployment to end 2025 at 4.4%, Werther is projecting a year-end rate of 4.6%, saying recent data including jobless claims has indicated softening in the labor market.

“If the unemployment rate is expected to move higher, just aligning with what we’ve seen in the labor market, and inflation isn’t expected to move much beyond what the Fed is projecting, then it opens the door to further easing in support of the labor market later this year,” Werther said.

Fed funds futures indicate markets expect two rate cuts by the end of this year, with the next one likely in September, according to LSEG data. Such bets were bolstered by benign inflation reports this week.

Investors are also focused on Trump’s selection to succeed Fed Chair Jerome Powell, with the president regularly urging the central bank to lower rates. Trump earlier this month said a decision on the next chair would be coming soon, although he said on Thursday that he would not fire Powell, whose term ends in May 2026.

The release of monthly retail sales on Tuesday will also be in focus. Investors want to see if tariffs are leading to higher prices that pressure consumer spending.

Trade developments are likely to continue to keep markets on edge, with a 90-day pause on a wide array of Trump’s tariffs set to end on July 8. A trade truce this week between China and the United States offered hope that the two countries can reach a lasting resolution, but the absence of detailed terms left room for potential future conflict.

The S&P 500 is up 1.6% so far this year. But the index has gained 20% since its low for the year on April 8, and is 2.7% off its record high set in February.

“The market has rallied so hard, so fast,” said Marta Norton, chief investment strategist at retirement and wealth services provider Empower. “There is vulnerability to anything that doesn’t support that kind of benign narrative that has been established.”

(Reporting by Lewis Krauskopf in New York; Editing by Alden Bentley, Nick Zieminski and Matthew Lewis)

Oil firm as intensifying Israel-Iran conflict stokes supply disruption fears

TOKYO – Oil prices climbed on Monday, extending Friday’s rally, as renewed strikes by Israel and Iran over the weekend increased concerns that the battle could widen across the region and significantly disrupt oil exports from the Middle East.

Brent crude futures rose USD 1.12, or 1.5%, to USD 75.35 a barrel by 0019 GMT, while US West Texas Intermediate crude futures gained USD 1.10, or 1.5%, to USD 74.08. They had surged more than USD 4 earlier in the session.

Both benchmarks settled 7% higher on Friday, having surged more than 13% during the session to their highest levels since January.

The latest exchange of strikes between Israel and Iran on Sunday resulted in civilian casualties and heightened fears of a broader regional conflict, with both militaries urging civilians on the opposing side to take precautions against further strikes.

The latest developments have stoked concerns about disruptions to the Strait of Hormuz, a vital shipping passage.

About a fifth of the world’s total oil consumption, or some 18 to 19 million barrels per day (bpd) of oil, condensate and fuel, passes through the Strait.

“Buying was driven by the ongoing Israel-Iran conflict, with no resolution in sight,” said Toshitaka Tazawa, an analyst at Fujitomi Securities.

“But as seen last Friday, some selling emerged on concerns of overreaction,” he said.

While markets are watching for potential disruptions to Iranian oil production due to Israel’s strikes on energy facilities, heightened fears over a Strait of Hormuz blockade could sharply lift prices, Tazawa added.

Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), currently produces around 3.3 million bpd and exports more than 2 million bpd of oil and fuel.

The spare capacity of OPEC and its allies, including Russia, to pump more oil to offset any disruption is roughly equivalent to Iran’s output, according to analysts and OPEC watchers.

US President Donald Trump said on Sunday he hopes Israel and Iran can broker a ceasefire, but added that sometimes countries have to fight it out first. Trump said the US will continue to support Israel but declined to say if he asked the US ally to pause its strikes on Iran.

German Chancellor Friedrich Merz said he hoped a meeting of the Group of Seven leaders convening in Canada on Sunday would reach an agreement to help resolve the conflict and keep it from escalating.

Meanwhile, Iran has told mediators Qatar and Oman that it is not open to negotiating a ceasefire while under Israeli attack, an official briefed on the communications told Reuters on Sunday.

(Reporting by Yuka Obayashi in Tokyo; Editing by Matthew Lewis, Paul Simao, and Muralikumar Anantharaman)

Stocks, oil sell off as Israel strikes Iran

SINGAPORE – Israel has begun carrying out strikes on Iran, two US officials said, adding there was no US assistance or involvement in the operation. The officials, who spoke on condition of anonymity, declined to provide further information.

Financial markets reacted, with US stock futures down more than 1%, oil prices jumping and US Treasury prices up.

QUOTES:

KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO:

“Traders are scurrying for safety as reports of a strike on Iran cross the wires, but details on the scale and magnitude of the attack remain scarce and moves have been relatively limited thus far.”

CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE:

“The geopolitical escalation adds another layer of uncertainty to already fragile sentiment.

“The key question now is whether this marks a brief flare-up or the beginning of broader regional escalation. If the situation de-escalates quickly, markets may retrace some of the initial moves. But if tensions rise — particularly with any threat to oil supply routes — the risk-off mood could persist, keeping upward pressure on crude and haven assets.”

(Reporting by Reuters markets team)

US yields continue slide after worsening labor data

US Treasury yields on Thursday were lower for the fourth straight session as markets absorbed economic data pointing to a worsening labor market and a moderate uptick in wholesale inflation.

A USD 22 billion auction of 30-year bonds also revealed strong demand, helping allay concerns that foreign investors could shift away from the US market over the expanding federal deficit. A Wednesday auction of 10-year Treasuries likewise pointed to healthy uptake from buyers.

According to the Labor Department, total insured unemployment, or all people receiving benefits, overshot expectations to rise to 1.956 million workers, the highest level in nearly four years.

Meanwhile, the annual reading of the Producer Price Index ticked one tenth higher to 2.6%, in line with expectations, even though a closely watched “core” reading, which excludes volatile food and fuel categories, was cooler than the prior month’s print.

Lou Brien, market strategist at DRW Trading, said investors likely were reacting to labor market weakness and believed consumer price increases from President Donald Trump’s trade wars were in the pipeline even if they had yet to materialize.

“There are many details in the labor market that have shown weakness for a long time,” he said. “I think the move higher in the continuing claims and the weekly claims is starting to confirm some of that weakness.”

“We’re still anticipating there’s gonna be some kind of a jump in prices. We keep thinking that month after month and nothing happens, but I don’t think that thought has left the market.”

Chinese authorities on Thursday affirmed a trade deal reached this week with Washington, though specifics remain unclear.

In Thursday’s 30-year auction, bonds sold at a high yield of 4.844%, more than a basis point below where the market put the yield at the close of bidding. Overall demand was 2.43 times the amount of debt on offer, in line with its recent average.

“It was a very, very solid auction,” said Jan Nevruzi, US rates strategist at TD Securities in New York. “The end user demand was pretty high, above recent averages, and it stopped through after a pretty substantial rally on the day.”

The yield on the benchmark US 10-year Treasury note was last down 5.3 basis points to 4.361%. The yield on the 30-year bond fell 6.3 basis points to 4.846%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, fell 3.3 basis points to 3.912%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.295% after closing at 2.313% on June 11.

The 10-year TIPS breakeven rate was last at 2.274%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

The US dollar 5 years forward inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.433%.

(Reporting by Douglas Gillison, Editing by Nick Zieminski)

China, Hong Kong stocks fall as initial Sino-US trade optimism wanes

HONG KONG – Stocks in China and Hong Kong traded lower on Thursday, led by declines in the tech sector, as markets struggled to sustain the positive momentum from the Sino-US trade talks that lacked concrete details.

China’s blue-chip CSI 300 Index closed about 0.1% lower after wavering through the day, slipping from the three-week high touched on Wednesday.

Hong Kong’s Hang Seng index lost 1.4% at close to pull back from the nearly three-month high hit in the previous session.

Tech shares led losses in onshore and offshore markets. The CSI Semiconductor Index shed 1.5%, while the Hang Seng Tech Index dropped 2.2%.

Among major losers, chipmaker SMIC fell 2% to a one-week low. Alibaba 9988.HK weakened 3.2% and EV-maker Xpeng slid 6.7%.

The CSI Rare Earth Index closed flat after slipping nearly 1% in the morning session and continued to hover near its seven-month high.

A trade truce between the world’s two biggest economies was back on track, U.S President Donald Trump said, a day after negotiators from Washington and Beijing agreed on a framework to ease bilateral retaliatory tariffs.

Under the agreement, Beijing will lift export curbs on rare earth minerals and the US will restore Chinese students’ access to its universities, Trump said on Truth Social.

Yet the terms remain subject to final approvals, with details notably absent. The 55% tariffs on Chinese imports will also stay, US Commerce Secretary Howard Lutnick said.

“We still don’t know if what Trump says will actually happen. It’s disappointing that the tariffs rates were not dialled down at all and tech curbs on China were not even mentioned,” said Jason Chan, senior investment strategist at Bank of East Asia, Hong Kong.

The talks left key issues, like chip exports, unaddressed, leaving room for conflicts in the future, and no one knows for how long the current truce will last, he added.

Chinese markets have been struggling to recover from trade shocks for the past two months after Trump announced sweeping tariffs on April 2 that threatened the global trade system.

The CSI 300 Index has barely eked out any gains since then, while the Hang Seng Index has climbed 3.5%, but the two are underperforming the nearly 10% bounce in the MSCI World Index.

The market is less sensitive to trade talks and investors are shifting focus to economic fundamentals, Wang Zhuo, partner at Zhuozhu Investment, said.

“The key for China now is to bolster manufacturers’ confidence and break the deflationary trend.”

(Reporting by Jiaxing Li in Hong Kong and Samuel Shen in Shanghai; Editing by Sumana Nandy, Sherry Jacob-Phillips, and Jamie Freed)

Dollar keeps losing market share but euro is no winner either: ECB study

FRANKFURT – The dollar continued to lose market share last year as the world’s dominant currency but mostly smaller rivals and gold benefited rather than the euro, which aspires to fill any void left by receding confidence in the greenback, an ECB report showed.

Investors have sold off dollar assets since April because of erratic US economic policy and ECB President Christine Lagarde said this was an opportunity for the euro to become the dollar’s alternative, provided the 20-nation bloc would finally push ahead with key integration steps.

But figures predating this most recent turmoil suggest that the euro is not becoming more popular, and besides the Japanese yen, non-traditional currencies may be benefiting.

In 2024 alone, the dollar lost 2 percentage points in its share in global foreign exchange holdings and while the euro made small gains, the yen and the Canadian dollar were the big winners, the ECB said on Wednesday.

Although the dollar still has a 58% market share in global foreign exchange reserves, this is down by 10 percentage points in the past decade. Meanwhile, the euro’s share has hovered just below 20%.

Another big winner last year was gold, with central banks increasing their stock by more than 1,000 tonnes, a record pace and double the annual level seen in the previous decade, the ECB said.

“Survey data suggest that two-thirds of central banks invested in gold for purposes of diversification, while two-fifths did so as protection against geopolitical risk,” the ECB said.

When all foreign reserves are added together, gold at 20% accounted for a bigger share than the euro, which stood at 16%, the ECB added.

However, there have been some signs since April that euro assets may finally be benefiting.

US yields have increased but the dollar has weakened sharply against the euro, a highly unusual correlation, which appears to suggest that investors are questioning the dollar’s status as the world’s premier asset.

These market moves indicate that investors are demanding a higher risk premium to hold US assets and remain uncertain about debt sustainability given Washington’s fiscal path.

There has also been a steady stream of US firms issuing debt in euros, often called reverse Yankee Bonds, and the euro did increase its share last year in foreign currency-denominated bond issuance.

The euro zone, however, lacks critical financial infrastructure to take meaningful share from the dollar, economists warn.

It lacks a truly liquid, large-scale safe asset since debt is issued by each country, leaving the bloc’s debt market fragmented.

Its banking system is also fragmented and the EU lacks a capital market union with harmonised rules and large, cross-border players. Moreover, Europe also lacks military defence capabilities to provide the sort of geopolitical assurance reserve managers demand.

(Reporting by Balazs Koranyi; Editing by Kim Coghill)

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