Influential President of the European Central Bank Christine Lagarde published an opinion piece in the Financial Times this week, which outlined some fairly profound views on the US dollar, but also the euro and the role it could play as an alternative global reserve currency. She said that “we are witnessing a profound shift in the global order: open markets and multilateral rules are fracturing, and even the dominant role of the US dollar, the cornerstone of the system, is no longer certain. Protectionism, zero-sum thinking and bilateral power plays are taking their place. Uncertainty is harming Europe’s economy, which is deeply integrated in the global trading system, with 30 million jobs at stake.”

Ms Lagarde went on to emphasise that “the shift underway also offers opportunities for Europe to take greater control of its own destiny and for the euro to gain global prominence.” Ms Lagarde makes a good point with the euro presently the world’s second most-used currency, accounting for 20% of global FX reserves – compared with 58% for the greenback. And she is right about the benefits reserve currency status would bring, which include lower borrowing costs and insulation from sanctions and coercive measures. The US wields a big stick globally with the dollar as the reserve currency.

Ms Lagarde then mentioned that “such a step towards greater international prominence for our currency will not happen by default: it must be earned. As in previous periods, today’s concerns about the dominant currency are not yet triggering a major shift towards alternatives. Instead, they are reflected in a rising demand for gold.” This has been my view for some time now, and to hear it this week coming from the President of the world’s second most important and powerful central bank was an endorsement. We can also expect the ECB to continue diversifying away from the US dollar and buying more European bonds and gold.

It is totally plausible that the euro will ascend in the global financial markets order. I fully expect the currency to emerge as a viable contender to the dollar as the reserve currency. Political events this year with the White House’s decision to move away from Europe militarily (and contribute more financially) but also the misguided tariff policy, could polarise financial markets in terms of the euro being an alternative.

Europe plays a major role in global trade. Presently, as Ms Lagarde correctly observed, Europe is the world’s largest trader, and number one partner with 72 countries, representing almost 40% of global GDP. “This is reflected in the share of the euro as an invoicing currency, which stands at around 40%. The EU must use this position to its advantage by forging new trade agreements.” There is no question that with the recent disruption brought on by the US trade policy, Europe will cement its role even further in global trade and build on long-established relationships. The US on the other hand, is becoming increasingly isolationist and will lose out over the longer run.

Ms Lagarde went on to write “The exorbitant privilege of an international reserve currency, referred to by Valéry Giscard d’Estaing back in the 1960s, comes with responsibilities…Europe is undergoing a major shift towards rebuilding its hard power, which should also help bolster global confidence in the euro.”

Ms Lagarde poignantly concluded that “History teaches us that regimes seem enduring — until they no longer are. Shifts in global currency dominance have happened before. This moment of change is an opportunity for Europe: it is a “global euro” moment. To seize it and enhance the euro’s role in the international monetary system, we must act decisively as a united Europe taking greater control of its own destiny.”

I think this was the most important piece of information to hit the newswire this week. Europe will use the dislocation caused to global trade by the Trump Administration as a golden opportunity to further cement and build on the euro’s role in the global financial system. I called the breakout on the euro in recent months, and believe a bull market has finally arrived for the currency.

Ms Lagarde’s comments about gold were also very pertinent. The US dollar’s reputation as a safe-haven asset is on trial. We saw this over the past week and a few hours before Israel attacked Iran last Thursday. The DXY US dollar index fell below its recent April 21st low. In a “normal” market backdrop of the type that has existed for the last 50-odd years, such a military action could have been expected to spark a “risk off” appreciation of the dollar—especially after the bearish decline over recent months.

Investment strategist Gavekal said this week that “one reason for the US dollar’s fairly subdued response could be President Donald Trump’s inability to stop the sudden pivot from nuclear talks to war, reinforcing the US’s waning role as the global policeman…Trump could yet mediate a de-escalation between Israel and Iran, which should dampen demand for safety assets and perhaps bolster the dollar’s credentials as a safe-haven asset in any future Middle Eastern conflict. Still, it is hard to see a ceasefire occurring, especially as US diplomats have not had much luck talking down Russia and Ukraine.”

This is a very good point. The way the US dollar has traded since the outbreak of war in the ME is revealing. The dollar has struggled all week – which is the exact opposite of history and what has occurred in the past 80 years since the dollar became the world reserve currency. Financial markets are no longer flocking to the greenback as the world’s number one hedge and standard. In fact this week, the euro did the heavy lifting in FX markets and rose against the dollar.

Powering up!

According to Goldman Sachs, after decades of being on the back stage, the world’s supply of nuclear energy is poised to increase significantly in coming years. Goldman Sachs Research analysts are forecasting that by 2040, global nuclear generating capacity will rise from 378 gigawatts (GW) to 575 GW, representing an increase in nuclear power’s share of the global electricity mix from around 9% to 12%. The bank expects an increase in generating capacity to coincide with a surge in support for nuclear power globally and a spike in investment in nuclear generation.

This follows President Donald Trump signing executive orders to accelerate nuclear adoption in the US in May, which aims to expand nuclear power from around 100 GW today to 400 GW by 2050. Meanwhile, China plans to build 150 nuclear reactors over the next 15 years, with the target of reaching 200 GW of nuclear energy generation by 2035. This number could prove conservative. Meanwhile, at the most recent COP29 meeting (the United Nations Climate Change Conference) in November 2024, 31 countries pledged to advance the goal of tripling the world’s nuclear generation by 2050.

The steep selloff in uranium stocks also looked to have concluded. URA or the Global X Uranium Miners ETF (US:URA), which is also listed in Australia (AU:ATOM) has rebounded off the primary uptrend at $20 to breakout above resistance at $33.90 to make fresh ten year highs at $37.80. Scope is open for renewed upward momentum and we envision a retest of the next historical resistance level towards $50 within a year.

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