Core Focus: The currency composition of the ECB’s foreign reserves, the active management of USD, JPY, and CNY portfolios, and the governance structures for reserve operations.

In-Depth Notes:
The ECB’s foreign reserves are held in a diversified portfolio of currencies, reflecting the global nature of the euro area’s external transactions and the need to manage currency risk. The composition of the reserves changes over time, reflecting changes in market values of invested assets, as well as the ECB’s foreign exchange and gold operations .

Currency Composition and Portfolio Allocation:
The ECB’s foreign reserves portfolio consists of US dollars, Japanese yen, Chinese renminbi (CNY), gold, and special drawing rights . The US dollar is the dominant reserve currency, followed by the Japanese yen. The inclusion of CNY reflects the growing importance of the Chinese currency in global trade and finance. In a standard rebalancing of its foreign reserves in the first quarter of 2025, the ECB sold a small portion of its US dollar holdings and fully reinvested the proceeds in Japanese yen . The ECB generated a gain of 909 million euros from this transaction . The weight of dollars in the ECB’s foreign currency assets dropped to 78% from 83% a year earlier .

Active Management:
The US dollar, Japanese yen and Chinese renminbi (CNY) reserves are actively managed by the ECB and selected euro area NCBs acting as agents of the ECB that wish to be involved in this operational activity . NCBs can opt to pool their operational activities for the management of the ECB’s foreign reserves with other NCBs . Each NCB or pool of NCBs usually manages a single US dollar or Japanese yen portfolio as an agent of the ECB . Active management means that portfolio managers take positions that deviate from the benchmark in order to generate excess returns (alpha). The framework is designed to create incentives to enhance performance and promote risk-taking at various levels, encourage open information and knowledge sharing, and support inclusiveness within the Eurosystem .

Gold Reserves and Central Bank Gold Agreements:
The ECB holds gold as part of its foreign reserves. The ECB has carried out sales of gold in full conformity with the Central Bank Gold Agreement and the Joint Statement on Gold . The ECB and 21 other central banks that were signatories of the Agreement decided not to renew it upon its expiry in September 2019 .

Risk Management and Governance:
The ECB is directly responsible for managing the risks entailed by its portfolios, including its foreign reserves and own funds portfolios . The management and monitoring of the financial risks incurred by the ECB covers the areas of market, credit and liquidity risks and involves four key areas of responsibility: the setting of limits for credit and market risks; compliance; the measurement and reporting of risk exposures and performance; and strategic asset allocation . The independent reporting of risk and performance is a key feature of the ECB’s investment framework . To avoid potential conflicts of interest, the management of financial risks incurred in portfolio management activities is entrusted to the Directorate Risk Management, which reports directly to the Executive Board .

Coordination with NCBs:
NCBs require ECB approval before they intervene on foreign exchange markets in managing their foreign reserves. This secures the conduct of a single European monetary and currency policy . It concerns all transactions which may affect the foreign exchange market and the liquidity of the Eurosystem money market . NCBs do not need ECB approval to invest foreign reserves and to transact obligations to the BIS and IMF