The meeting between Ukrainian President Zelensky and US President Trump yesterday certainly went better than feared. At least in comparison to the disastrous meeting in February. However, it remains to be seen whether real progress has been made towards a ceasefire or even peace in Ukraine, Commerzbank's FX analyst Volkmar Baur notes.

A reduction in the reserves may become a long-term headwind for USD

"This morning, at least, the currency market remains unimpressed and largely unchanged. This is likely due to the fact that the positions still seem very far apart at the moment. This is primarily because the Russian president is unwilling to deviate from his maximum demands. The US president, on the other hand, seems to be losing interest in the issue. There is currently no talk of further sanctions against Russia, despite grandiose announcements before Friday's meeting in Alaska."

"According to data from the US Treasury, foreigners hold a total of around 9,128 billion US dollars in US government bonds, which corresponds to roughly one third of all outstanding securities. Assuming the upper end of the range, China therefore holds a maximum of around a quarter of all government bonds in foreign hands, or around 8% of all outstanding Treasuries. In contrast, if we look at US government bond holdings in the hands of close US allies, we arrive at a total of $4,732 billion. That is more than twice as much as China and more than half of all US government bonds held by foreigners. The key point here is that US allies hold so many US dollars precisely because they are allies of the US."

"30% of the current volume held would correspond to around $1,400 billion, which is around two-thirds of what China is estimated to hold. Of course, a reduction in the reserves of US allies would not happen overnight, as is repeatedly feared in the case of China. However, even a long-term reduction of this geopolitical premium, which would take years or even longer, could represent a long-term structural headwind for the US dollar. It is often said that political markets have short legs. However, when realities change, this is also reflected in the markets in the long term."