When the euro appeared in the global financial system, many analysts predicted the role of the new world reserve currency instead of the dollar. Euro and Dollar Forecasts turned out to be overly optimistic, although reasonably reasonable. Based on the combined financial strength of Western Europe, the single European currency had the prerequisites in order to take away the status of the main world reserve currency from the US dollar. Although the European currency quickly became the second in the world, so far it has not been able to move the US dollar from the top of the global financial system. There were several reasons for this, including liquidity, the financial instability of the European Union, problems of sovereign debts of the EU countries. In 2008, the financial crisis added problems, and the rapid growth in the value of the Chinese yuan weakened the position of the euro in the world, which is clearly visible on the chart of the Euro against the US Dollar.
WORLD RESERVE CURRENCY QUALITIES
In order for a sovereign currency to become a world reserve currency, it must meet several requirements. First, this currency must be authoritative and solid enough to be used in international financial transactions. Secondly, the currency must be supported by a powerful economy and a government trusted by international financial circles. And finally, such a currency should be considered valuable and stable for the Central Banks of other countries. The currency is called the reserve currency because the Central banks of different countries use it to accumulate and stabilize their own currencies.
Theoretically, any currency can become a reserve if it is recognized by all countries of the world. But in reality, there are only a few. Since the beginning of the twentieth century, the US dollar has been considered the world’s main reserve currency. About 60% of international payments are made in this currency. The second place in recent years is the European currency. With the help of the euro, 25% of international payments are made. The British pound until the beginning of the twentieth century occupied the first place, and now it accounts for about 10% of the global turnover. Other currencies have long been involved in international settlements: Swiss franc, Japanese yen, Australian and Canadian dollars. The first steps as a world currency are made by the Chinese yuan. All these currencies are officially recognized as a reserve by the International Monetary Fund.
EURO LIQUIDITY PROBLEMS
The total amount of euros in circulation is simply not enough to be used as the main currency for international transactions. Although the European Central Bank has pursued a policy of quantitative easing in recent years, this has not been enough. In addition, large EU countries do not want to completely transfer sovereign financial control to ECB commissions. Each country has its own price and salary policy. Bonds and other securities are also issued by individual countries. There is no single debt in the European Union, the economies of individual countries vary significantly in their pace of development.
All of these factors hinder the worldwide spread of the euro. The leadership of the ECB has never sought to ensure the euro status of the first world currency. This was repeatedly stated by the former head of the Bank, Jean-Claude Trichet. Therefore, the European currency has not spread widely to the countries of America and Africa. As a reserve currency, the euro is used mainly by countries in Europe, Asia, and the former Soviet Union.
EUROPEAN UNION AND EURO STABILITY
Euro liquidity issues are directly related to the general and economic stability of the European Union. The recent sovereign debt crisis, problems with Greece and other less developed countries reduce the overall fundamental reliability of the single currency. Despite the growth of Germany’s economy, the strongest in the EU, overall economic growth rates remain low. The banking system is under constant pressure. In this regard, the US dollar looks much better, and the Federal Reserve is responding quickly to changes in the economy.
The political stability of the European Union also does not provide the conditions for an international reserve currency. Frequent change of government in Italy and Greece, separatist sentiment in Spain – only a small part of European problems. And the British exit from the European Union further reduced confidence in the single European currency. Political and economic problems led to the depreciation of the euro, as well as other exchange rates against the dollar. If from the moment of its appearance and before the crisis of 2008, the euro grew by 60% against the dollar, then the rate fell almost to parity. Such fluctuations weaken the attractiveness of the European currency as a reserve. But these same fluctuations attract speculators of the foreign exchange market, who begin to influence the change in the exchange rate. The EUR / USD currency pair is considered the main one among the companies of our independent 2018 Forex broker rating.
The rapid growth of the Chinese economy in the twenty-first century, overtaking the largest US economy, has become an obstacle to the wider spread of the euro as a reserve currency. In addition, the renminbi is quite stable. The increasing importance of China and its share in world production is accompanied by the desire to introduce the yuan into the global financial system. China has accumulated trillions of dollars in its foreign exchange reserves, seeking international investment. Therefore, the world community is forced to reckon with its preferences. China has created more than a dozen banks around the world to carry out settlements in RMB. Recently, the International Monetary Fund granted the renminbi the status of reserve currency in Special Drawing Rights (SDRs), which is official recognition.
The global financial system is entering a period of uncertainty. What was previously taken for granted in relation to the dollar is no longer so clear today, and in the future, the American currency may not be so secure. But for now, even a cursory glance at potential replacements shows that not one of them is close to the status of the main international reserve currency. So, it looks like the dollar will remain at the top of the world for a long time. Please note that most Forex companies offer to trade a pair of EUR USD. Among the most recommended intermediaries is the Alpari forex broker, with a large number of attractive trading conditions. Also, read all reviews of Forex brokers with comments about other companies on our website.