The €uro era?

A shift in correlation with risk aversion suggests the euro may be positioning itself to challenge the US dollar at the core of the global financial system

In recent weeks, a subtle but powerful signal has emerged: the long-standing correlation between the U.S. dollar and global risk aversion appears to be shifting. Following what markets dubbed “liberation day,” the dollar weakened sharply against major currencies; most notably, the euro. This move was unexpected. Based on historical patterns, a spike in risk aversion should have led to dollar strength, not weakness. But this deviation may not be mere noise. It could be pointing to something deeper. Historically, the dynamic between currencies and risk sentiment has been clear-cut. During periods of market stress, the U.S. dollar tends to strengthen, supported by its deep liquidity, vast capital markets, and status as a safe haven. The euro, by contrast, has often acted as a funding currency, typically weakening during episodes of global uncertainty as investors de-risk and unwind euro-funded positions.

However, this well-established correlation structure appears to be undergoing a transformation. Recent data reveal that in episodes of market volatility the dollar has not behaved as expected. Rather than soaring, it has begun to depreciate, defying its conventional role. This kind of behavior cannot easily be dismissed as an anomaly. Instead, it may be an early sign of a deeper realignment in the architecture of global capital flows.

What might explain this reversal? It is not just a matter of changing market sentiment, but of structural evolution in the global financial system. Over the past decade, European funding markets have become significantly more resilient and far less dependent on wholesale U.S. dollar funding than they were during the sovereign debt crisis. The scars of 2011 prompted European policymakers to rethink the very infrastructure of the euro area’s financial system, and the result is a more robust, self-sufficient ecosystem. Meanwhile, the European Central Bank has expanded and refined its monetary policy toolkit, thus contributing to greater stability in the Eurozone's financial plumbing, reinforcing the credibility of euro-denominated assets and reducing fragmentation across member states. Moreover, not only the specter of European disintegration, a theme that weighed heavily on markets throughout the last decade, but also the simpler fragmentation across European countries have gradually receded. Political will has converged in key areas of fiscal and monetary integration, and this has not gone unnoticed. Investors from traditionally risk-averse regions are increasingly viewing the euro not as a liability, but as an asset worth holding in periods of stress. In this new configuration, it is not unthinkable that in times of global rebalancing, the euro is now absorbing a share of the capital flows that once reflexively fled to the dollar.

This development, while still nascent, carries significant implications. If sustained, it would suggest that the euro is emerging as a “risk-off” currency; not merely a counterpart to the dollar, not a plain co-anchor in the global financial landscape, but a potential substitute. In this evolving regime, the euro may begin to share, or eventually take over, part of the dollar’s historical role in systemic hedging and flight-to-safety flows. Crucially, this shift hinges not only on the strengthening credibility of the euro, but also, and perhaps more significantly, on the perceived erosion of confidence in the U.S. dollar. Recent market behavior suggests the latter may be playing a more decisive role. Global investors had the feeling that something good was happening in Europe. The recent announcements gave them the proof that something incredible might happen also in the US.

Global investors had begun to sense that something was shifting in Europe; a feeling that momentum was building, that the region was quietly turning a corner. But it was the most recent announcements that transformed intuition into conviction. They triggered a parallel realization: if structural progress was possible in Europe, then perhaps even the seemingly immovable landscape in the U.S. could be challenged. What had once felt unthinkable, a rebalancing of monetary leadership, now seemed plausible. The idea that the euro could play a larger, even transformational, role in the global financial system was no longer just theoretical. It had become a narrative markets were starting to believe in.

Of course, none of this implies that the euro is poised to dethrone the dollar overnight. The greenback continues to dominate in terms of trade invoicing, international debt issuance, and the composition of global FX reserves.

But financial systems are not only shaped by hard metrics; they are also governed by expectations, perceptions, and the behavior of markets, in particulare when they are under pressure. If the euro’s performance during periods of risk aversion continues to resemble that of a safe-haven currency, then the psychological architecture underpinning the current monetary order may already be shifting beneath our feet.