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 U.S. 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.
U.S. 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 U.S. assets and remain uncertain about debt sustainability given Washington's fiscal path.
There has also been a steady stream of U.S. 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.
