Dhe euro largely maintained its international market share among the world’s currencies at around 20 percent last year. Although a geopolitical drama is taking place right on the borders of the euro area with the Ukraine war and although the currency devaluation of the euro with inflation rates of more than 10 percent at times was higher than ever before in the history of the European monetary union, international investors, trading companies and states are not fled the euro.
Nevertheless, there have been notable shifts, as the European Central Bank (ECB) explains in its annual report on the international role of the euro, which was presented on Wednesday.
Apparently there had been fears that the Ukraine war could hit the euro more than the dollar internationally, simply because its currency area is closer to Russia and Ukraine and dependence on Russia, for example in energy supplies, was much greater. The delivery failures from Ukraine, for example for grain or sunflower oil, had fueled inflation in the euro area more than in the United States.
Lagarde: Euro remains resilient
“Despite a series of new shocks, the international role of the euro has remained resilient in 2022,” said ECB President Christine Lagarde. “However, status as an international currency should not be taken for granted. This new situation increases the responsibility of European politics to create conditions in which the euro can thrive.”
A notable development regarding euro cash occurred at the beginning of the Ukraine war. While there was increased demand for euro cash at the beginning of the pandemic, although people were encouraged to pay by card in retail, this had returned to normal over time.
However, when the war in Ukraine began, demand for euro cash flared up again. And not just from the euro area; since especially from the states near the war zone such as Lithuania, Estonia or Finland. But also from countries outside the euro area, especially from Eastern Europe.
The large bills of 100 and 200 euros were particularly in demand. This seems to have calmed down somewhat as early as May last year. A comparable demand for dollar cash was apparently not observed in the period.
It is also interesting what has happened with the currency reserves of the states. Last year the exchange rate of the dollar was at times very strong. During this phase, many currency reserve managers appear to have sold US government bonds that were held as dollar reserves because the exchange rate appreciation pushed the holdings above their target levels. Instead, investments in currencies such as the Japanese yen or the British pound were bought in addition to the euro. The gold purchases by the central banks were also exceptionally high. In addition to Turkey and China, oil states such as the United Arab Emirates also invested part of their income from the booming crude oil business in gold.
The Rise of China’s Renminbi
The ECB is closely monitoring the rise of the Chinese currency renminbi. At the moment, however, the euro does not have to fear this as competition for second place among the international currencies. However, the ECB used the example of the replacement of the pound sterling as the world’s leading currency by the dollar from the 19th to the 20th century to remind us that there can also be changes in world currencies over time.
China’s currency has gained importance in Russia business in 2022. Since the beginning of the war, the proportion of Russian exports that are paid for in rubles or renminbi has increased significantly; partly a consequence of the sanctions imposed by the West, but partly also of Russia’s own efforts and shifts in trading partners.
“Russian trade invoiced in renminbi rose to 16 percent in December 2022, having been practically zero just before the invasion of Ukraine,” writes the ECB. “At the same time, the use of the renminbi in Russia’s cross-border payments has increased significantly.”
However, in many categories that are regularly monitored by the ECB, the euro holds a good second place after the dollar, well ahead of the yen and renminbi. This applies to use as a currency reserve as well as on the bond market, for international loans, in the cross-border payment system Swift or with regard to turnover on the foreign exchange market.
The introduction of a digital euro in the coming years should not necessarily result in an expansion of the international importance of the currency if others establish something similar. Intensifying European cooperation is important, said ECB Executive Board member Fabio Panetta: “The further economic and financial integration of Europe will make a decisive contribution to strengthening the resilience of the role of the euro in a potentially more fragmented global economy.”
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