Gabriel Makhlouf, the head of the Irish central bank and a member of the ECB governing council, spoke at a conference in France. He discussed why the euro isn’t ready to replace the US dollar as the world’s main reserve currency. The problem lies in Europe’s incomplete economic and financial integration. Makhlouf pointed out that the eurozone does not have a single fiscal structure or a safe asset like US Treasuries. He mentioned that recent gains in the euro compared to the dollar are more about concerns over U.S. governance than any shift in currency dominance. He urged the European Union to take advantage of current global uncertainties to strengthen its internal market. He also suggested enhancing collective financing and increasing strategic independence within the EU. In short, Makhlouf emphasizes that even though the euro may temporarily gain strength against the dollar, it does not mean it is close to overtaking the dollar as the leading reserve currency. The core issue is structural. The eurozone is still divided in significant ways, such as lacking a unified budget across member countries and a shared government bond that serves the same purpose as US Treasuries. Because of this, large institutions—like foreign central banks or sovereign wealth funds—have little incentive to shift away from dollar-denominated assets for a long time. This observation is crucial. Currency fluctuations can lead to quick changes in various derivatives like options and futures. However, here we have a senior policymaker cautioning against getting too excited about temporary euro gains. The euro might be rising now, but this is partly due to worries about American governance, not a sign of European strength. This situation also implies that the current ups and downs in euro-related contracts might not truly represent structural changes; rather, they may be driven by events and not by lasting shifts in capital flows. This perspective should guide how we manage exposure in the coming weeks. Risking too much based solely on euro appreciation overlooks ongoing uncertainties. Makhlouf also highlights what Europe should do in the current situation. He argues that policymakers should view instability in other areas as an opportunity to strengthen Europe. This means enhancing financial integration within the bloc and rethinking how Europe’s capital resources are pooled and utilized. He advocates for greater independence in economic strategy, reducing dependence on external partners for supply chains and financial systems. From a positioning standpoint, these ideas won’t have immediate effects. However, they will influence the future currency risk environment. If Europe moves toward stronger fiscal coordination or common borrowing instruments, we can expect longer-term volatility and rate products to adjust accordingly. For now, the FX market seems to respond to external events rather than underlying policy fundamentals. At this moment, positioning should be based on observable trends rather than speculation. Keep exposure durations brief and focus risk strategies on known short-term catalysts. Even if the euro continues to rise, it’s essential to look deeper; this uptick is not driven by robust demand but by waning confidence in other areas.

here to set up a live account on VT Markets now