In recent months, global financial markets have witnessed episodes of heightened volatility, with trade tensions being a key source of uncertainty. The first half of 2025 was marked by rising uncertainty, reflecting a combination of factors including rising trade tensions, shifting geopolitical dynamics, and growing concerns about fiscal sustainability in the US (Figure 1). The emphasis on trade policy as a key policy instrument by the current US administration culminated in the announcement of sweeping tariffs on its trading partners on 2 April 2025. This announcement resulted in pronounced bouts of financial market stress in the days that followed. The VIX index – a widely recognised gauge of market volatility – surged beyond 50, reflecting an acute rise in uncertainty and heightened risk aversion among investors (Figure 2). Similarly, option-implied volatility in bond and currency markets spiked, as uncertainty about future interest rate and exchange rate developments mounted, partly linked to worries about the potential implications of the shift in trade policy. The scale of volatility increases in April was substantial from a historical perspective, but in the months that followed, market uncertainty has recovered to relatively average levels, in spite of further geopolitical and economic uncertainties (Figure 2, zoom-in window in the left panel, as well as red and green dots in the right panel).
Figure 1 US economic and trade policy uncertainty indices
Sources: Bloomberg, based on Baker et al. (2016) and policyuncertainty.com.
Note: The latest observation is for 28 July 2025.
Figure 2 Option-implied volatility
(left panel: standardised indices, right panel: index)
Sources: Bloomberg and ECB staff calculations.
Notes: ‘Equity’ denotes the VIX index (one-month option-implied volatility of the S&P 500 index), ‘bond’ denotes the MOVE index (one-month option-implied volatility of US Treasury futures for two, five, ten, and 30-year maturity), ‘currency’ denotes the one-month option-implied volatility of the USD/EUR exchange rate. Left panel: Option-implied volatilities are standardised using z-scores. Vertical lines denote the following events: (1) ‘April 2025’ refers to the tariff announcement on 2 April 2025, (2) ‘Iran conflict’ refers to the start of the Iran-Israel conflict on 12 June 2025, (3) ‘Big Beautiful Bill signed’ refers to 1 July 2025. Right panel: Distributions of (not standardised) option-implied volatilities are calculated since 2010, bars denote 25th-75th percentile range, lines denote 5th-95th percentile range. April peak refers to 8 April 2025. The latest observation is 28 July 2025.
Cross-asset correlations observed after 2 April 2025 were different from those typically observed in risk-off episodes. The April events appear to have increased risk aversion among investors, prompting them to rotate into safe-haven assets. Typically, global risk-off episodes trigger safe-haven flows into safe currencies and bonds. In the past, such flows tended to temporarily lower yields on highly rated sovereign bonds such as US Treasuries and German Bunds, while the US dollar and other safe-haven currencies like the Swiss franc typically appreciated (Figure 3, solid blue lines). In early April, market perceptions of global risk increased, and volatility indices spiked. US yields fell initially, in line with historical patterns, but started to rise sharply after two days (Figure 3, dotted blue lines). Unusually, these developments in the VIX and US yields were accompanied by a depreciation of the US dollar and a strengthening of the euro.
In the months that followed, markets experienced another, much smaller and short-lived bout of uncertainty, following the events of mid-June related to the escalation of the conflict in the Middle East. In contrast to the April episode, this adverse geopolitical risk shock saw a slight appreciation of the US dollar.
Figure 3 Response of financial assets to major ‘risk-off events’
(cumulative percentage change)
Sources: Haver Analytics and ECB staff calculations.
Notes: EUR, USD and CHF refer to broad nominal effective exchange rates. Average response is calculated around the five biggest daily VIX-change episodes. ‘2 April risk-off’ shows the response after Trump’s tariff announcement.
To zoom in on the safe-haven behaviour of investors in April, we estimate a ‘safe-haven factor’. In our analysis, we derive a ‘safe-haven factor’ by modelling the co-movement among the major safe-haven assets, currencies, and key risk indicators. In particular, the ‘safe-haven factor’ is estimated as the first principal component of daily changes in the nominal effective exchange rate of CHF, JPY, USD, EUR, gold price returns, the first difference of ten‑year government yields for the US, Japan, and the euro area, and changes in the VIX index. All returns are standardised using z-scores to account for different variances across the indicators. The US dollar and euro are purged by domestic monetary policy and macro shocks estimated using the model of Brandt et al. (2026). For example, the US dollar return component used for the estimation of the ‘safe-haven factor’ is the residual from the regression of the daily USD net effective exchange rate returns on the US monetary policy and US macro shocks. The euro return component is the residual from the regression of the daily EUR net effective exchange rate returns on the euro area monetary policy and macro shocks. Our approach to use purged USD and EUR net effective exchange rate variables helps us control for major fundamental factors that might be influencing their developments and focus on the residual dynamics of these currencies. In addition, we purge gold price returns from the impact of the USD exchange rate developments by taking the residual from the regression of the gold price returns on the USD net effective exchange rate returns. The ‘safe-haven factor’ resulting from the principal component analysis explains around one third of the variance of its components and indicates the largest increases, among others, in late 2008 during the peak of the Global Crisis, in June 2016 after the Brexit referendum, in early 2020 during the Covid crisis, in August 2024 during a stock market plunge and unwinding of carry trades, as well as in April 2025 (Figure 4).
Figure 4 The ‘safe-haven factor’
(index)
Sources: Haver Analytics and ECB staff calculations.
Notes: The ‘safe-haven factor’ is estimated as the first principal component of daily changes in the net effective exchange rates of CHF, JPY, EUR, and USD (purged by monetary policy and macro shocks estimated using the model of Brandt et al. 2026); gold price returns (purged from the USD); the first difference of ten‑year government yields for the US, Japan, and the euro area; and the VIX. The estimation is daily from 2006 to 2025, the line illustrates cumulated monthly sums of the factor, while vertical lines denote the following events: (1) ‘Lehman collapse’ in September 2008, (2) ‘Onset of sovereign debt crisis’ refers to Greece receiving a bailout package in May 2010, (3) ‘Sovereign debt crisis escalation’ refers to the escalation of the European sovereign debt crisis due to Greek’s political instability in May 2012, (4) ‘Brexit referendum’ in June 2016, (5) ‘US-China trade war’ refers to the reciprocal imposition of tariffs during the first Trump administration, (6) ‘Covid-19’ in February 2020, (7) ‘SVB collapse’ in March 2023, (8) ‘August 2024 crash’ refers to the stock market plunge in August 2024, and (9) ‘April 2025’ refers to the tariff announcement. The latest observation is 28 July 2025.
Model evidence confirms that the co-movement of certain financial market variables with a safe-haven factor was different in April. Our principal component analysis further illustrates the different nature of the April 2025 risk-off episode. Figure 5 shows a typical co-movement of each variable with the ‘safe-haven factor’, estimated over the period from 2006 to March 2025 (red dots), as well as a range of the co-movement, estimated as +/- one standard deviation range of results using a three-year rolling window (yellow ranges). The typical co-movement is compared to the estimates for the period of April-July 2025 (blue dots). Typically, US Treasury yields co-move negatively with the ‘safe-haven factor’ (Figure 5, red dots and yellow ranges). This reflects the fact that US Treasury yields typically decline during periods of global risk aversion as the demand for US Treasuries increases. In the period following 2 April, however, US yields exhibited a less negative co-movement with the ‘safe-haven factor’ – as US Treasury yields increased after 2 April (Figure 5, blue dots). At the same time, the estimated co-movement of German Bunds with the ‘safe-haven factor’ remained stable. Looking at currencies, while the US dollar has typically appreciated following a deterioration in global risk sentiment, this co-movement switched signs in April 2025. By contrast, the co-movement of the euro exchange rate with the ‘safe-haven factor’, which has been historically close to zero, turned positive, closer to the usual behaviour of a safe-haven currency such as the Swiss franc.
Instances of changing co-movement of the US dollar with the ‘safe-haven factor’ have at times been observed in the past. While the usual co-movement of the US dollar with the ‘safe-haven factor’ tends to remain broadly stable (as shown in Figure 5 with yellow ranges), the instances of changing patterns are not unprecedented. For example, Figure 6 illustrates that there have been several times in the past years when the co-movement of the US dollar with the ‘safe-haven factor’ declined or even turned negative. For example, a period of somewhat negative co-movement has been observed in the early months of 2017, after the introduction of the fiscal stimulus during the first presidency of Donald Trump. Further examples of a slightly lower co-movement of the US dollar with the ‘safe-haven factor’ include the months after the downgrade of US credit rating by Fitch from AAA to AA+ in August 2023, the period of US equity market sell-off in the fall of 2018, when the stock market priced in negative effects of the trade war with China, the slowdown in global economic growth and concerns about rising interest rates, as well as the Covid period in 2020, which was characterised by outflows from US Treasuries observed during the ‘dash-for-cash’ episode. Comparing these estimates with April 2025 (blue dot for USD in Figure 5), the most recent change in the co-movement of the US dollar with the ‘safe-haven factor’ has been substantial, which might suggest that the policy-related news and uncertainty were relatively pronounced, as compared to past episodes. In addition, strong currency market developments following the April event might have been reportedly linked to the rebalancing of hedging activity among international investors, covering currency risks related to previously unhedged exposures in US dollar-denominated assets. With respect to yield developments, US Treasury yield increases after the April 2025 episode were accompanied by the decline in measures of the convenience of US Treasuries.
Related academic research offers a broader perspective on the dynamics in longer-term US yields. Jiang et al. (2025b), as well as Jiang et al. (2025c) document a trend of declining US convenience yields in recent years linked to, among others, concerns about a deteriorating fiscal situation. Such concerns have also gained market attention in the recent months.
Figure 5 Co-movement of financial assets with a ‘safe-haven factor’
(index)
Sources: Haver Analytics and ECB staff calculations.
Notes: Dots show the weights in the first principal component estimated from daily changes in the net effective exchange rate (NEER) of CHF, JPY, EUR, and USD (purged by monetary policy and macro shocks estimated using the model of Brandt et al. 2026); gold price returns (purged from the USD); the first difference of ten‑year government yields for the US, Japan, and the euro area; and the VIX. Red dots: sample from 1 January 2006 to 31 March 2025; blue dots: 1 April 2025 – 15 July 2025 (the sample covers several weeks to ensure a sufficient number of observations). Yellow area: +/- one standard deviation range of results using a three-year rolling window. The latest observation is for 28 July 2025.
Figure 6 Past events of temporary shifts in USD co-movement with the ‘safe haven factor’
(index)
Sources: Haver Analytics and ECB staff calculations.
Notes: Bars show the weights of the USD net effective exchange rate (purged by monetary policy and macro shocks) in the ‘safe-haven factor’, as defined in Figure 3, estimated over the following selected periods of time: (1) ‘Trump’s fiscal stimulus’ 1 January 2017 to 1 June 2017, (2) ‘US downgrade by Fitch’ 1 August 2023 to 1 October 2023, (3) ‘US equity sell-off’ 1 October 2018 to 1 January 2019, (4) ‘COVID’ 1 March 2020 to 1 September 2020, and (5) ‘Full sample’ 1 January 2006 to 31 March 2025, as in Figure 5.
To give perspective on potential shifts in demand for US assets, US portfolio investment data for April show high outflows, but they were not unprecedented in scale and appear to have normalised since May. Apart from pricing indicators, currently available data on portfolio holdings do not show persistent outflows from the US (Figure 7). To obtain the most comprehensive picture, we review both EPFR and US Treasury data, which provide higher-frequency portfolio allocation estimates (EPFR data), and records of foreign portfolio holdings (Treasury data). Weekly data on flows into US portfolio investment funds showed substantial but temporary outflows in the first week or two immediately after the tariff announcements. Putting the net sales of US bonds in a historical perspective, they were lower than the 95th percentile of weekly outflows observed since 2012. However, foreign net purchases subsequently recovered, such that they remained broadly stable when taken for the months of April and May as a whole, for equities, bonds, and money markets, and added to the broad inflows observed since the elections (Figure 7, Panel A, left).
Focusing on euro area investors, there is evidence of some outflows from US bond funds by these investors, albeit the pattern has been temporary so far (Figure 7, Panel A, right).
Data from the US Treasury International Capital System (TICs) indicate that foreign investors registered over $50 billion in net sales of total US long-term securities in April 2025, $40 billion of which were in US Treasuries (Figure 7, Panel B, left). The scale of net sales of US Treasuries by foreign investors in April is comparable to those observed in November and December 2024 and stands close to the 95th percentile of outflows since 2012, albeit nowhere near the rate of outflows from US Treasuries observed during the ‘dash-for-cash’ episode that followed the onset of Covid in March 2020 (Barone et al. 2022). Sales by foreign investors of US Treasuries were driven by net sales by private sector investors ($46 billion) rather than investors from the official sector (who purchased $6 billion). Looking across different economies, the largest sales of US Treasuries in April 2025 were recorded by Canada ($57 billion), the euro area ($21 billion), and China ($7 billion).
For US equities, US TICs data indicate net sales by foreign investors of around $19 billion in April (Figure 7, Panel B, right). However, the TICs data also suggest that foreign demand for US securities has rapidly recovered. Net foreign purchases of US Treasury securities rebounded to $146 billion bonds in May, while the equivalent figure for US equity securities was $114 billion. Overall, the currently available data point to some temporary rebalancing (for example related to adjustments of hedging), which so far appears to have stabilised. At the same time, policy uncertainty remains high, signalling possible further shocks, as concerns about policies seem to persist.
Figure 7 Investor flows to US assets
(USD billions)
Panel A: Net flows to funds investing in the US
Panel B: Net foreign purchases of US Treasuries and equities
Source: EPFR Global, Haver Analytics, US Treasury International Capital (TIC) System and ECB staff calculations.
Note: Panel A: ‘All investors’ refers to flows to US funds by all investors, ‘EA investors’ refers to flows from euro area-domiciled investors to US funds, based on EPFR Global data. ‘Bond’ and ‘Equity’ are based on EPFR definition of country flows. Distributions are calculated since 2012. ‘April flows’ refer to the weekly flows following Trump’s tariff announcement on 2 April, ‘Covid flows’ refers to the flows in the last week of March 2020 during the ‘Dash for Cash’ episode. The last observation is for 23 July 2025 (weekly data). Panel B: Net foreign purchases of US Treasury securities and equities, based on US Treasury International Capital (TIC) System data. Distributions are calculated since 2012. ‘April flows’ refer to the April monthly flows following Trump’s tariff announcement on 2 April, ‘Covid flows’ refers to the flows in March 2020 during the ‘Dash for Cash’ episode. The last observation is May 2025 (monthly data).
Authors’ note: Helpful discussions with and comments by M. Ferrari Minesso, A.-S. Manu, A. Mehl, F. Pires, T. Tomov, I. Van Robays and I. Vansteenkiste are gratefully acknowledged.
References
Acharya, V and T Laarits (2025), “Tariff war shock and the convenience yield of US Treasuries – a hedging perspective”, Working paper.
Adrian, T, R Crump and E Moench (2013), “Pricing the term structure with linear regressions”, Journal of Financial Economics 110(1): 110–138.
Ahmed, R and A Rebucci (2025), “A ‘reverse conundrum’ and foreign official demand for US Treasuries”, VoxEU.org, 15 January.
Baker, S R, N Bloom and S J Davis (2016), “Measuring Economic Policy Uncertainty”, The Quarterly Journal of Economics 131(4): 1593-1636.
Barone, J, A Copeland, C Kavoussi, F M Keane and S Searls (2022), “The Global Dash for Cash: Why Sovereign Bond Market Functioning Varied across Jurisdictions in March 2020”, Federal Reserve Bank of New York, Staff Reports No. 1010.
Beck, R, V Burian, G Georgiadis and P McQuade (2025), “Geopolitics and foreign holdings of euro area government debt”, Special Feature A, The international role of the euro, European Central Bank, June.
Brandt, L, A Saint Guilhem, M Schröder and I Van Robays (2026), “What drives euro area financial market developments? The role of US spillovers and global risk”, International Journal of Central Banking, forthcoming.
Chen, Y, J Fang and D Liu (2023), “The effects of Trump’s trade war on U.S. financial markets”, Journal of International Money and Finance 134.
Domenech Palacios, M, M Grothe, P McQuade, M Ricci and J Vendrell Simón (2025), “How spillovers from US developments differ across euro area equity sectors”, Box A in Special Feature B, Risks to euro area financial stability from trade tensions, Financial Stability Review, May.
Hartley, J and A Rebucci (2025), “Tariffs, the dollar, and equities: High-frequency evidence from the Liberation Day announcement”, VoxEU.org, 15 April.
Jiang, Z, A Krishnamurthy and H Lustig (2021), “Foreign safe asset demand and the dollar exchange rate”, Journal of Finance 76(3): 1049-1089.
Jiang, Z, A Krishnamurthy, H Lustig, R Richmond and C Xu (2025a), “Dollar upheaval: this time is different”, Working paper.
Jiang, Z, H Lustig, S Van Nieuwerburgh, Z Chen and M Xiaolan (2025b), “Exorbitant privilege gained and lost: fiscal implications”, Journal of Political Economy.
Jiang, Z, R Richmond and T Zhang (2025c), “Convenience lost”, Working paper.