As the European Central Bank exits negative interest rates and euro area government bond yields rise, the euro is regaining favor among central bank reserve managers. According to a survey by the London-based think-tank OMFIF, roughly 20% of the 75 central banks surveyed plan to increase their euro holdings over the next two years, reflecting a net demand higher than any other currency.
The positive outlook for the euro follows notable changes in the global financial landscape. With the ECB’s move away from negative rates, euro-denominated assets are now yielding positively, making them more attractive to reserve managers. Taylor Pearce, senior economist at OMFIF, notes that central banks are increasingly looking to increase their currency allocation to the euro, especially as the dollar’s appeal wanes.
Poland and Romania are among the countries signaling their intent to increase euro holdings. Poland’s central bank acknowledges the improved returns of euro area government bonds, while Romania plans to maintain its target weight of euros in reserves. However, not all central banks have disclosed their intentions, citing market sensitivity.
Geopolitical factors, including the United States’ rivalry with China and the fallout from Russia’s war in Ukraine, have also contributed to discussions of diversification away from the dollar. The freezing of Russian assets by Western nations has prompted evaluations of alternatives to the dollar, with the euro emerging as a potential beneficiary.
Despite the challenges posed by recent geopolitical events, European assets have seen increased demand from foreign investors. Surging bond sales to fund post-COVID recovery and joint EU bond issuance have bolstered the appeal of European debt. Belgium and supranational bodies like the European Financial Stability Facility have reported growing interest from non-European investors, including those from Asia and Africa.
Overall, the euro’s resurgence reflects growing confidence in European cohesion and unity, particularly in the aftermath of the COVID-19 pandemic and the conflict in Ukraine. Analysts highlight the shift in sentiment towards Europe, with positive outlooks replacing previous skepticism among investors.
