Euro loses its shine as a reserve currency compared to dollar and yen, warns ECB

Euro Loses Ground in Global Reserve Currency

In 2023, the share of the euro in global currency reserves has decreased, weakening the weight of the common currency on the global stage.

The euro in foreign exchange reserves slipped last year in favor of the dollar and the yen, and further declines are possible as soon as Russia is free to reduce its euro reserves, as demonstrated by the European Central Bank in a document.

Challenges Faced by the Euro

Despite the significant increase in interest rates in the Eurozone, this has not improved the attractiveness of the currency.
This is due to the fact that the cost of money is higher in many other countries and because of the weak economic prospects of the Eurozone.
The ECB has therefore raised the alarm about the need to strengthen the single currency.

The euro’s share of currency reserves dropped by a whole percentage point to 20% in 2023, with reserve managers selling net euro assets of around 100 billion euros, the ECB stated in a report on Wednesday.

Challenges and Concerns

Citing a recent survey conducted on 91 central banks on the HSBC Reserve Management Trends, the European Central Bank stated that both the financial architecture and the prospects of the bloc are grounds for concern.

Geopolitical tensions have also been impacting how countries conduct their commercial payments and how national central banks accumulate reserves.
Therefore, according to Lagarde, “the international status of the euro should not be taken for granted.”

Geopolitical Impact on the Euro

Geopolitical tensions, wars, and the dangerous global fragmentation witnessed after the outbreak of the war in Ukraine also affect the currency system and the weight of the euro globally.

The future of the single currency is clouded by Russia’s plans.
According to estimates by the ECB, the Central Bank of Russia held about 8% of global reserves in euros before they were immobilized in 2022.

Call for Strengthening the Euro

To have a stronger euro, Cipollone, a member of the ECB’s Executive Board, expressed the need “to build a true European Union of capital markets…in parallel with efforts to further strengthen the fiscal dimension of the EU’s economic and monetary union.”

It is time to create the conditions for true resilience of the euro in such unstable and changing times, also in terms of currency fluctuations.