By Jamie McGeever

ORLANDO (Reuters) – The euro has had a low share in world currency reserves for many years due to negative interest rates from the eurozone and high bond yields. This has prompted huge bond outflows. However, these trends are changing. Reserve managers now notice the euro again.

According to the International Monetary Fund, their latest compilation of official foreign currency reserves (COFER), data shows that central banks have increased their Euro holdings by up to $70 billion during last year’s fourth quarter.

According to HSBC, this was the highest in three years.

COFER does not include the financial market turmoil triggered by Russia’s February invasion of Ukraine and Western economic sanctions against Moscow.

These included the freezing almost half the $640 billion Russian foreign reserve stash. This prompted intense discussion about the future of the reserves and how the U.S. will be perceived as the global currency king.

Morgan Stanley David Adams, a strategist at the NYSE:, notes that reserve managers employ three main investment criteria when allocating their funds: safety, liquidity and returns. The euro could see all three of these boxes being ticked.

There is a rapid decline in negative yielding bonds within the Euro zone. The European Central Bank could have positive interest rates by the end the year. Liquidity will rise when the ECB starts to reduce its balance sheet. Additionally, the Russia-Ukraine conflict could encourage more issuances of high-rated euro zone joint bonds.

Adams said that if the ECB starts to normalize their policy, it would improve liquidity and increase returns for investors.

2.644% is the current percentage of euros in $12.05 Trillion of currency-known FX reserve funds. Late 2009 saw a peak of 28%, while the lowest was 17% in 2000.

In recent years, the euro has held a remarkable amount of FX reserves. The euro’s share of FX reserves remained stable between the third quarter 2017 and the last quarter 2021. It was in an extremely narrow range of 20.07% and 21.29 percent. In fact, only one of the 18 quarters saw it rise above 21%.

GRAPHIC: Global FX Reserves https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnmklgpq/COFER.jpg

EURO RESILIENCE

The dollar’s percentage of FX reserves worldwide has declined by almost five points over the past five years to 58.11%, a low that was 25 years ago.

The euro can be seen in one of two scenarios: either central banks were more cautious about the dollar and favored the euro over other currencies, or the euro proved to be more resilient than that dollar in terms central bank FX reserves diversification.

There is still a lot to be made up for the euro slump that occurred after the ECB switched from ‘ZIRP to ‘NIRP’ – from zero to negative interest rates policy – to June 2014. Over a period of two years, the euro’s percentage in world FX reserves dropped by 5 percent.

Tradeweb reported that euro-denominated government debt with negative yields in euros peaked at nearly 7 trillion euros on its bond trading platform in late 2020. That’s 75% of the almost-9 trillion sovereign euro bond markets.

The amount of negative yielding debt fell to 2.07 trillion euros at the close of the month. This was the lowest level since Tradeweb began compiling data in 2016.

GRAPHIC: Negative-yielding Euro zone debt https://fingfx.thomsonreuters.com/gfx/mkt/akvezjbogpr/NEGYIELD.png

Goldman Sachs analysts (NYSE:) have put the total net outflow to fixed income markets of euro zone since 2014 at nearly 3 trillion euros.

Zach Pandl from Goldman Strategy wrote last month that “a reversal” of persistent outflows could be important for the euro. This was after he and his team elevated their euro forecast to bullish and above-consensus $1.20 in 12 months, and $1.30 by 2024. On Wednesday, the euro stood at $1.09

It appears that the reversal is underway.

Other columns:

Ebbing dollar reserves do not have dominance power (Reuters April 8)

Reuters March 18, 2018: China could be unnerved by yuan reserves

Reuters March 2: Russia’s central bank may freeze FX reserves to accelerate ‘peaking’ (Reuters)

(These opinions are the views of the columnist at Reuters.

(By Jamie McGeever. Additional reporting by Dhara Ranasinghe, London. Editing by Andrea Ricci.