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The dollar has been the world's reserve currency since the end of World War II, when it replaced the British pound...
A rising euro is waking up European policymakers to the disadvantages of an ambition they have long cherished: turning the common currency into a reserve currency to rival the US dollar.
The dollar has been the world's reserve currency since the end of World War II, when it replaced the British pound. This special status has meant that it is the currency in which most global trade is conducted and in which governments around the world hold the bulk of their foreign exchange reserves. This demand has allowed the U.S. government and Americans to borrow cheaply for decades.
The lure of lower borrowing costs, a more stable currency and protection from US sanctions are why European policymakers are holding onto ambitions to replace the dollar. But governments and investors will not hold onto the euro unless it is strong and promises to remain so.
And a strong euro is already threatening the export-led growth model of Europe's largest economy, Germany.
" I have been following the development of the dollar exchange rate with concern for a long time. The dollar exchange rate is a significant additional burden on the German export industry ," German Chancellor Friedrich Merz told reporters in Berlin on Wednesday.
ECB President Christine Lagarde floated the idea of a “rare global euro moment” last summer as cracks began to appear in the dominance of the US dollar. While foreign investors have largely trusted US stock and bond markets, they appear to have been more actively hedging themselves against the risk of a fall in the dollar itself, contributing to the euro’s rise.
The greenback still accounts for about 57 percent of all global reserves, compared to the euro, which ranks second with about 20 percent.
“ If you want your currency to be a global reserve, you have to accept that it will strengthen. The logic is simple: The greater the appetite for European assets, the higher the exchange rate against other currencies. If the ECB is to stick to its ‘global euro moment,’ it will have to accept this trade-off ,” said Carsten Brzeski, global head of macro-finance at ING.
Merz's concern is that a stronger euro will make European exports too expensive for foreign buyers, who will look for cheaper goods elsewhere, hurting the EU economy. It also tends to make Chinese imports to Europe cheaper, given that Beijing generally tries to keep the exchange rate stable against the dollar. The euro is near a 12-year high against the yuan.
It's not just EU governments that are worried. ECB policymakers are worried too. Within hours of the euro passing $1.20, central bankers began warning that they might have to act to prevent inflation from falling below 2 percent.
"We are closely monitoring this appreciation of the euro. This is one of the factors that will guide our monetary policy and our decisions on interest rates over the coming months ," the head of the French central bank, François Villeroy de Galhau, said on Wednesday in a post on social media on LinkedIn, echoing similar warnings from his Austrian counterpart, Martin Kocher.
Europe's exporters have been in a miserable state over the past two years, due to high domestic production costs, free-riding Chinese competition and, most recently, U.S. trade tariffs, which act as a tax on American purchases of eurozone goods. Anything that makes them even more expensive in the world's most important market would come at a particularly bad time.
That's a high price to pay for an economy like the eurozone, which has a persistent trade surplus and whose short-term growth depends on a favorable exchange rate. A very high price, according to US Treasury Secretary Scott Bessent.
“I can tell you that if the euro goes to $1.20, the Europeans are going to complain that it’s too strong; they’re an export economy, so let’s see what happens. They have to be careful what they wish for ,” Bessent said in an interview with CNBC in July./ Adapted from “Politico”
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