ECB captures flight from dollar: euro increasingly behaving as a safe haven currency

The euro has begun to behave as a safe haven currency against the backdrop of geopolitical shocks in 2025 and early 2026, the ECB writes in its latest June review of the euro's international role. The main sign of this is that the effective exchange rate of the European currency strengthened at the same time as the traditionally defensive franc and yen, while the US dollar, on the contrary, weakened.

The ECB points out that in 2025 and early 2026 there have been several episodes of investors fleeing from risky assets to protective assets (risk-off episodes). One of the main ones is the introduction of trade duties by the U.S. administration on April 2, 2025. This caused high volatility in the global financial markets and a marked strengthening of the euro along with the traditional safe haven currencies - the Swiss franc and the Japanese yen. According to ECB estimates, the effective exchange rates of these currencies increased compared to the rates at the beginning of the year by about 2.5 percentage points for the euro, by 4 p.p. for the franc and about 6 p.p. for the yen.

The US dollar exchange rate, on the contrary, decreased by 1.5 p.p. relative to the beginning of 2025. Against this background, yields on US Treasury bonds rose. The situation resembled the beginning of the pandemic, when investors were also actively selling US bonds. The yield on 30-year securities rose to a record 4.8% since 2013.

"Such cross-asset dynamics are atypical for classic risk-aversion phases," the ECB wrote.

Similar patterns have been seen in other risk-aversion situations sourced from the US, the regulator continues. Among them were reports that the DOJ had issued subpoenas to the Fed as part of a criminal investigation formally related to Jerome Powell's Senate testimony on the Fed's $2.5 billion renovation project.

Another risk-off episode is the Trump administration's threats to again increase duties on European imports amid the escalating situation around Greenland. U.S. President Donald Trump has said he intends to seek Greenland's accession to the United States, considering both "purchase" and hard pressure options, including a bill to grant the island statehood.

The ECB admits that after the outbreak of war in the Middle East in February this year, the euro first weakened - its effective exchange rate fell by about 1.5-2 p.p., taking into account the events in the period from January 1, 2025 to April 30, 2026. The Swiss franc was almost unaffected and kept in the range of 3-3.5 p.p. to the rate on January 1, 2025, while the yen lost about 3 p.p. over a year and a half, taking into account the risks of war.

Then, as geopolitical tensions eased, the European currency recovered some of its initial losses, the ECB points out.

Against the backdrop of risk-off episodes, foreign investors bought eurozone assets at a near-record pace in 2025, the ECB points out. Net investments in equities and bonds exceeded €850 billion - close to the highs in the history of the euro's launch in 1999.

Interest in the stock market was particularly notable, the regulator said: inflows into equities, primarily through investment funds, rose to around €470 billion in 2025 from €440 billion a year earlier.

This article was AI-translated and verified by a human editor