Euro fails to nab big market share from dollar despite erratic US policy, report shows

FRANKFURT, June 2 (Reuters) - The global role of the euro currency hardly budged last year, disappointing some hopes that erratic economic policy in the United States could give it a big boost, as investors moved into gold and smaller currencies instead, an ECB report showed.

ECB President Christine Lagarde has long argued that the euro could become a viable alternative to the dollar and unpredictable U.S. policy created a "global euro moment", if policymakers only enacted long-stalled financial reforms.

The euro now has about a 20% market share across a broad set of indicators, a touch higher than last year, but still far below levels seen two decades ago, as gold and smaller, non-traditional reserve currencies have been making big gains at the expense of the dollar and the euro.

"There is an opening for the euro to enhance its global appeal – provided that European policymakers create the necessary conditions and put words into action," Lagarde said in the ECB report on Tuesday.

For this to happen, she said, the bloc needed to reinforce economic resilience, legal and institutional integrity and geopolitical credibility.

The euro made its biggest gain in the issuance of international debt denominated in euros, which exceeded $1.1 trillion last year, its highest level since the currency was created, helped by relatively low costs and tight margins.

The issuance of so-called Reverse Yankee bonds, or debt issued by U.S. firms in euros, then swapped back into dollars, rose nearly 50%, supporting the surge.

But the euro's role in foreign exchange reserves fell 0.5 percentage point to 20.2%, far below the dollar's 57% share, suggesting that reserve managers avoid abrupt changes to strategic investment benchmarks, even during heightened geopolitical uncertainty.

Investments were also moving heavily into gold with central banks and private investors buying unusually large volumes.

Private investment into gold doubled last year to 2,200 tons while central banks bought 850 tons, below the 1,000 tons in the previous year but still well above levels prior to Russia's invasion of Ukraine.

With gold also included in official reserves, its share has exceeded that of the euro and U.S. Treasuries, though much of this increase is down to higher gold prices and not only new purchases.

The euro suffered the biggest setback in daily foreign exchange trading, though this was due in large part to a surge in dollar hedging, prompted by the greenback's unusually large volatility on a raft of policy announcements, especially around tariffs.

Still, others managed to gain, particularly the Chinese renminbi, as its share is now 9%, the ECB said.

"There is no room for complacency," Lagarde said. "Forces of fragmentation are becoming more pronounced."

(Reporting by Balazs Koranyi; Editing by Muralikumar Anantharaman)