RPT-ROI-Tech blues, shifting Fed/ECB sands and euro haven?: Mike Dolan

By Mike Dolan

LONDON, Nov 17 (Reuters) - The euro's gains during a stressful week for world markets raise interesting questions about whether it's behaving as a safety play at a time of U.S. tech sector doubts and changes in central bank profiles either side of the Atlantic and in Tokyo.

The euro's 12% gains against the dollar this year came mostly in a turbulent first half, but it's retained the bulk of 2025's appreciation despite four European Central Bank interest rate cuts over 12 months.

As Wall St's tech giants wobbled again last week and Federal Reserve officials turned more hawkish, the dollar neither benefited from a safety bid nor the reduced Fed easing bets.

What's more, the euro's gains are wider. The single currency hit record highs against Japan's yen last week and its highest in more than two years against Britain's pound.

While both moves hinged on domestic political sagas in Tokyo and London, those two currencies together account for more than 10% of the euro zone's external trade weights.

The yen's traditional role as a safety play in times of financial anxiety, rooted mostly in an assumption of Japanese capital repatriation in antsy times, seemed absent last week. It may be undermined by a fresh loosening of fiscal policy there and political pressure on the Bank of Japan to keep money easy.

Only the Swiss franc, propped additionally by U.S. tariff rate cuts, gained on the euro. But even that may eventually meet resistance from a deflation-wary Swiss National Bank.

Overall, the euro's nominal effective exchange rate index against more than 40 trading partners continues to surf near record highs and is back on the rise again. The ECB's measure is less than 1% from the all-time peak it hit in September.

THREE DRIVERS

Three things may be buoying the euro.

First is the potential for some rebalancing of transatlantic flows going forward if U.S. tech is seen as overpriced and AI bubble fears mount. Second is the possibility of institutional shifts at the top of the ECB and Fed over the next two years and, finally, there's the long-awaited Germany fiscal lift that's expected to hit through 2026.

On the first, valuation fears surrounding the U.S. AI investment frenzy have some touting a long-standing reversal of Wall Street's years of equity out-performance. Goldman Sachs, for example, reckons U.S. returns will now trail global peers in Europe, Asia and the emerging world for the next decade.

As it stands, the euro zone runs a substantial positive net international investment position (NIIP) of some 1.43 trillion euros ($1.67 trillion) of overseas assets, more than 9% of GDP. Essentially, that's the amount of European money parked in overseas assets, mostly in the United States, over foreign holdings of euro zone assets.

Although that's off the peaks of late last year due to exchange rate effects, that NIIP contrasts starkly with the gigantic U.S. NIIP shortfall of $26 trillion - liabilities that ballooned as European and global portfolios chased mostly tech-related American 'exceptionalism' over the last 15 years.

The prospect of at least some unwinding of these flows and imbalances and a return of home bias may now be at play - with the exchange rate possibly both feeding off and driving the shift.

CENTRAL BANK LEADERS

To be sure, equities everywhere may get caught in a major downdraft on Wall Street - but the debt market and 'safety' aspects of the relative investment proposition may also be in flux and be of more long-lasting importance.

Early 2026 is set to be a testing time for the Fed. President Donald Trump seems set to reshape the leadership of the central bank - culminating in the appointment of a new Fed Chair from May and likely positioning appointees to a majority of Fed board seats from January onwards.

Despite the rearguard action from more hawkish regional Fed bosses this month, concern about Fed independence keeps speculation of further deep Fed easing later next year on the table - and possibly regardless of above-target inflation.

In Europe too, there are early murmurs of a change of tack at the ECB as Christine Lagarde's presidency ends in 2027. And some speculation surrounds a break in euro convention to allow a German central banker take the helm of the bank for the first time - something sidestepped in the early days of the single currency to avoid assumptions of Bundesbank dominance.

Although many names are already swirling in the corridors, current Bundesbank boss Joachim Nagel made a pointed pitch this week. "In principle, any central banker on the ECB Governing Council should be eligible to succeed to the top position in the euro system," he said, adding he and others had the credentials.

If that were to come to pass, a more inflation-wary head of the ECB could be in prospect.

And that dovetails with a likely concern in Berlin that loosening its fiscal reins - with up to a trillion euros of additional defense and infrastructure spending through next year - does not stoke inflation into the bargain.

The rationale behind "safe havens" in currency markets can sometimes be slippery.

But in a year ahead that promises at least some equity nervousness, ongoing political upheaval and wariness of 'hot' inflation, the euro's role bears watching.

The opinions expressed here are those of the author, a columnist for Reuters

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($1 = 0.8575 euros)