Three main themes emerged from the European Central Bank’s annual conference. They are different responses to trade shocks in Asia and the West, the gradual decline of the US dollar’s dominance, and the waning benefits of relying on the neutral rate. The shift away from the US dollar as a reserve currency is expected to happen slowly. Global uncertainty and the lack of a clear replacement are causing this gradual change. ECB President Lagarde highlighted the euro’s potential to play a bigger role as a reserve currency. This would need improvements in geopolitical stability, stronger laws, larger capital markets, and better economic conditions in Europe. The Governor of the Bank of Korea noted that a strong Korean won signals political stability. Korean fund managers increasing their hedging ratios have supported the won, along with the Taiwanese dollar and Japanese yen. Looking closely, we can see a blend of forces influencing how monetary authorities, investors, and central bankers operate. A key difference exists: in Asia, countries are handling trade disruptions with greater resilience, whereas in the West, policymakers are reacting with unease and sometimes contradictory actions. At its core, this is about capital protecting itself in various ways—through money-market tools, foreign exchange movements, and complex hedge strategies. This situation pressures traders to realize that the US dollar’s status as the world’s main reserve currency, while not ending soon, is starting to weaken. The change isn’t quick or dramatic, but the trend is becoming clear. Currently, no alternative is equally liquid, well-integrated, or stable. However, just because a strong alternative isn’t available now doesn’t mean one won’t emerge later. When Lagarde mentioned the euro’s potential to grow as a reserve currency, she wasn’t claiming it would happen soon. Instead, she recognized the challenges: fragmented European capital markets, varying legal frameworks, and inconsistent economic performances. These barriers slow progress. Watching for any easing of these issues—even slightly—may be more telling than big changes in interest rates. From Asia, there’s a focus on stability through domestic means—currencies are supported not by direct intervention but through behavior changes among local institutions. Governor Rhee pointed out that fund managers are raising their hedging ratios, aiming for more predictable returns, especially during times of global volatility. This strategy not only supports the Korean won but also indirectly benefits currencies like the New Taiwan dollar and Japanese yen. It appears stability is being sought through protective measures rather than direct defense. For those monitoring price risks through derivatives, we need to pay attention to how the motivations for capital flows are shifting. Policymakers’ varied approaches to trade impacts suggest that long-term rate anchors, particularly around the neutral rate, may be losing practical relevance. If older models relying on stable neutral values no longer work, we must consider different ones. In a climate where rates are driven less by theory and more by strategic positioning, discussions about what constitutes ‘neutral’ may pivot to focusing on velocity: how swiftly capital moves, how long it holds a position, and what triggers changes. Delaying a reassessment can lead to ineffective hedging. It’s not about timing the shifts but recognizing when traditional rules no longer apply. That’s where adjustments begin. Relying solely on data to force changes rarely succeeds; it’s wiser to approach these adjustments with caution.

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