The Euro's Ascendancy in Global Reserves: Trump-Era Trade Uncertainty and the Shift Toward Diversification

The global financial landscape has long been dominated by the U.S. dollar, but recent shifts in central bank reserve allocations suggest a recalibration driven by geopolitical and economic forces. The Trump-era trade policies (2017–2021), particularly the U.S.-China trade war, have accelerated currency diversification strategies, with the euro emerging as a key beneficiary. This analysis examines how trade uncertainty and strategic hedging have reshaped reserve management, using data from the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) to highlight the euro's growing influence.

The Trump-Era Trade War and Reserve Diversification

The U.S.-China trade war, characterized by tariffs and retaliatory measures, created systemic uncertainty for global markets. Central banks, tasked with safeguarding economic stability, began reevaluating their reliance on the U.S. dollar. According to the IMF's COFER data, the dollar's share of global reserves fell to 56.32% in Q2 2025, down from higher levels in previous years, partly due to exchange rate fluctuations and diversification efforts. This decline, though modest, reflects a broader trend: nations seeking to reduce exposure to U.S. policy risks, including sanctions and trade disruptions.

The euro, meanwhile, saw its share rise to 21.13% of allocated reserves in Q2 2025, up from 20.00% in the prior quarter. This growth underscores the euro's role as a stable alternative, particularly for countries wary of dollar volatility. European economic resilience-despite domestic challenges like Brexit and the 2020 pandemic-reinforced confidence in the euro as a reserve currency.

Strategic Hedging and the Role of the Euro

Currency diversification is not merely a reaction to trade wars but a calculated risk-management strategy. Central banks in Asia, the Middle East, and Latin America have increasingly allocated reserves to euros and other non-dollar assets. For instance, China's reserve management has shown a subtle tilt toward euros, reflecting a desire to balance geopolitical dependencies.

The euro's appeal lies in its perceived stability compared to the dollar during periods of U.S. policy turbulence. The European Central Bank's (ECB) accommodative monetary policies, including negative interest rates and quantitative easing, have also made euros attractive for liquidity management. While the ECB's approach differs from the Federal Reserve's, it has provided central banks with a reliable secondary anchor.

Long-Term Implications for Global Finance

The shift toward the euro is part of a larger structural trend: the gradual erosion of the dollar's hegemony. While the dollar remained dominant, its share has declined from a peak of 72.7% in 1995 to 56.32% in 2025. This decline is not a sudden collapse but a measured reallocation driven by central banks' desire for resilience.

For investors, the euro's rising role in reserves signals growing demand for euro-denominated assets, potentially boosting European bond and equity markets. Conversely, overreliance on the dollar could expose portfolios to volatility if U.S. policies continue to prioritize short-term geopolitical goals over global financial stability.

Conclusion

The Trump-era trade war acted as a catalyst for central banks to diversify reserves, with the euro emerging as a preferred alternative to the dollar. IMF COFER data confirms this trend, highlighting the euro's 21.13% share in Q2 2025. While the dollar's dominance persists, the euro's gains reflect a pragmatic response to geopolitical uncertainty and a desire for balanced risk management. As global economic dynamics evolve, the euro's role in reserves is likely to grow further, reshaping the architecture of international finance.