Three key themes from the European Central Bank’s annual conference have been identified. These include differing responses in Asia and the West to trade shocks, the slow decline of US dollar dominance, and diminishing returns from reliance on the neutral rate.

The shift from the US dollar as a reserve currency is expected to be gradual. Global uncertainty and the absence of a clear alternative contribute to this slow transition.

Potential for the Euro

ECB President Lagarde mentioned the potential for the euro to assume a larger reserve role. This would require stronger geopolitical and legal foundations, deeper capital markets, and robust European economic conditions.

The Bank of Korea Governor stated that the strength of the Korean won reflects political stability. Increased hedging ratios by domestic fund managers have supported the won, the Taiwanese dollar, and the Japanese yen.

What is being described here is a convergence of forces that are quietly shaping how monetary authorities, investors, and central bankers need to behave. At the heart of it all is an interesting divergence: in Asia, trade disturbances are being managed with relatively more resilience, while in the West, policymakers are responding to the same pressures with a certain unease, in some cases even contradiction. At the core, it’s about capital defending itself in various ways—sometimes through money-market instruments, sometimes through foreign exchange moves, and increasingly through complex hedge strategies.

This framing also places pressure on traders to accept that the US dollar’s role as the world’s primary reserve currency, while not necessarily ending soon, has begun to erode. Not quickly and not dramatically—but the direction is now harder to dispute. No equally liquid, deeply integrated, and stable alternative exists at this stage. However, just because that alternative isn’t ready now doesn’t mean one will not eventually push through the cracks. When Lagarde pointed to the euro’s potential to take on a larger reserve function, she didn’t suggest it’s imminent. Instead, she acknowledged the barriers: fragmented European capital markets, insufficient legal alignment across borders, and a lack of consistent economic outputs. These are hurdles that will keep progress slow. That said, watching whether they begin to ease—even marginally—will be more informative than headline interest rate moves.

From Asia, we’re seeing an emphasis on stability through internal levers—currencies are being supported not through direct intervention but via behaviour shifts from domestic institutions. Governor Rhee explained that higher hedging ratios were taken up by fund managers who appear more focused on predictable returns, especially as volatility increases abroad. What stands out is that this strategy has reinforced not only the Korean won… but also indirectly supported peer currencies like the New Taiwan dollar and Japanese yen. Stability it seems, is being sought in layers—through protection, not defence.

Changing Motivations for Capital Flows

For those watching price risks via derivatives, we should be alert to changing motivations for capital flows. The dispersion in how policymakers are targeting trade impacts suggests that long-term rate anchors, especially assumptions around the so-called neutral rate, may be losing relevance in practical forecasting. There isn’t much left to extract from squeezing models that depend on stable neutral values—if the old reference points aren’t working, different ones must start being used. In a rate world driven less by theory and more by repositioning, the conversations around what is ‘neutral’ may be better replaced with questions about velocity: how fast capital moves, how long it holds a view, and what causes it to change that view.

We’ve seen that delaying reassessment leads to poor hedging. Timing these shifts isn’t about catching the move—but recognising when old rules have stopped guiding new outcomes. That is where the adjustment begins. Letting data force the issue rarely ends well. Better to let positioning lean into it cautiously.

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