20 Euro to US: Understanding the Euro’s International Role
The euro maintains a significant presence in the global financial landscape, consistently averaging around 20% across various international currency use indicators. In 2022, despite geopolitical tensions stemming from the war in Ukraine and subsequent economic sanctions against Russia, the euro held its position as the second most important currency globally. This resilience was observed amidst rising inflationary pressures and tightening monetary policies across major economies, leading to higher interest rates on dominant international currencies.
The euro’s strength in 2022 can be seen in its increased share of global official foreign exchange reserves, rising by 0.5 percentage points to 20.5% when measured at constant exchange rates. This growth occurred while the US dollar’s share declined. The euro also saw gains in the outstanding stock of international debt securities, loans, and deposits. Its share in foreign exchange settlements increased by almost 3 percentage points to approximately 38% at constant exchange rates.
While the euro demonstrated stability in various sectors, the latest Bank for International Settlements (BIS) Triennial Survey indicates a slight decline in its share of global foreign exchange turnover. This reduction is attributed to the comparatively stronger growth in trading of other currencies, including the US dollar and the Chinese renminbi. Despite this, the euro remains the second most actively traded currency in global foreign exchange markets.
The data, while not indicating substantial shifts in the use of international currencies following the onset of the war in Ukraine, underscores the dynamic nature of the global financial system and the need for continuous monitoring. The euro’s international role is fundamentally supported by a robust and integrated Economic and Monetary Union (EMU). Further development of the EMU, particularly advancements in the capital markets union and sound economic policies within the euro area, is crucial for the euro’s continued strength on the global stage.
Despite positive interest rate returns in the euro area in 2022, rates remained lower than those in other major economies. This difference could potentially disincentivize rebalancing towards euro-denominated assets. Factors such as interest rate differentials and active portfolio management by reserve managers play a crucial role in influencing currency composition within global reserves.
The appreciation of the US dollar in 2022, coupled with rising policy interest rates, prompted active portfolio management by official reserve managers. These managers sought to mitigate valuation effects stemming from exchange rate and bond price fluctuations. This active management included substantial net purchases of euro-denominated reserves.
The resilience of the euro in the face of global economic and political challenges underscores its importance in the international monetary system. However, maintaining and strengthening its role requires ongoing efforts towards a deeper and more complete EMU.