The European Central Bank published a Financial Stability Review special feature analysing how the 2 April 2025 US tariff announcement triggered an atypical risk-off episode in which the US dollar depreciated sharply while long-term US Treasury yields rose, and assessing what this could mean for euro area financial stability. The analysis frames the episode as a potential sign that US dollar-denominated assets may provide a less reliable hedge for euro area investors, who hold US dollar securities equivalent to around €6 trillion. Market stress saw the VIX spike to levels exceeded only during the global financial crisis and the COVID-19 pandemic, while ten-year US Treasury yields rose by almost 50 basis points between 4 and 11 April and US Treasury swap spreads fell further, signalling reduced “convenience yield”. The US dollar fell by 12% against the euro since the start of 2025, with around 7 percentage points occurring after 1 April, and speculative positioning flipped from net long to net short alongside evidence of increased FX hedging by non-US investors. For euro area investors, the breakdown of the usual negative correlation between risk sentiment and the US dollar meant currency moves exacerbated portfolio losses, with a US Treasury index total return down by around 5 percentage points in euro terms; while some asset prices and flows recovered after April, the US Treasury–US dollar correlation remained weaker than in 2024. The feature notes that persistent shifts in cross-asset correlations could undermine diversification and hedging, amplify losses via margin calls and forced selling, and interact with non-bank balance-sheet liquidity mismatches given that non-banks channel most euro area exposure to US assets and hedge only part of their currency risk. On policy considerations, the ECB highlights the need for continued regulatory and supervisory scrutiny of investor risk management practices and argues that scarcity of alternative safe assets leaves limited substitutes for the stabilising role historically played by US Treasuries and the US dollar. It calls for immediate and decisive progress on the European savings and investments union and the capital markets union to help foster a deeper and more liquid market for euro area safe assets, including swift agreement and implementation of the upcoming package of proposals on the supervision and integration of EU capital markets.

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