The Euro’s international role being tested

The trend in the last two years was characterised by various adverse factors to which the Euro was exposed, first and foremost of a political nature, starting with the Brexit vote through the new US administration to the challenges of elections in key EU member states. That said, the structural impact of the ECB’s securities purchasing programme also put the Euro’s reputation to the test. The ECB recently published its annual assessment of the “Euro’s international role” and examined the impact of the aforementioned developments on the Euro’s acceptance outside the EMU itself. In this context, the Euro’s international distribution is defined in terms of several selected functions of a currency. Only as a reserve currency did the Euro stand its ground at a low level; in the other areas its international distribution has essentially dwindled, while the US Dollar remains the undisputed no. 1 currency in the world.

The vote on the Euro as regards its role as an investment currency is emphatic, to its detriment. In 2016 foreign investors sold EMU securities totalling EUR 86 billion, a clear structural break with prior years when they made purchases in the treble-digit billions. A special case of the investment currency function is the official reserves maintained by central banks world-wide. Here the Euro has of late seen its status hold steady, albeit at a low level, with a share of just short of 20% of such holdings, compared with 64% committed to the US Dollar.

The Euro accounts for 31.3% of total international payments transactions, compared with 29.3% in 2015 and 44% in 2012. The US Dollar is again the clear leader as regards payment transactions, weighing in with 42.1% of the total. Of the total of USD 5.1 trillion transacted on an average day world-wide in the forex market, the Euro stood for 31.3%, while the US Dollar is the big gorilla in the room, contributing 87.6%. (The total shares amount to 200%, as each transaction always involves two currencies.) Compared to prior years the Euro has noticeably lost ground, as in its best year, 2010, it accounted for 39.1%.

Contrary to the high expectations voiced when it was introduced, the Euro has not succeeded in making a greater name for itself for international debentures (meaning those that are not denominated in the local currency). In 2004, when on a high it contributed 29.3% of the total, but has since dwindled steadily and at year-end 2016 the figure was only 22%. The decreasing role of the Euro as a financing currency initially seems counter-intuitive given the ongoing low-interest regime in Europe. What is presumably decisive here is the dissolution of the so-called “covered interest parity” situation. The fact that the basis for cross currency swaps has for some time now been lodged clearly in negative terrain has meant that synthetic USD financings denominated in Euro have increasingly lost their appeal.

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