The Decline of the Euro as an International Currency

While the U.S. dollar serves as the global reserve currency, the euro is still the second most traded currency today. However, during this past year the use of the euro has declined. With other emerging market currencies on the rise, such as the Chinese renminbi, the euro faces some competition.

“The biggest drop was recorded in the use of the euro as a funding currency, mostly due to the high cost of hedging against a fall in its value using swaps,” according to Economic Times. Although the euro has experienced a decline in its use as an international currency, it doesn’t seem to be losing its spot as the second most important currency in the international monetary system.

At the end of last year, a little less than 20 percent of foreign reserves were held in euros and central banks have continued to increase their reserves in euros. It is clear that the Chinese renminbi’s significance is growing as the ECB placed close to 500 million euros worth of its foreign currency reserves into renminbi earlier this year.

This is evidence of the impact other emerging market currencies are making. “We believe that the renminbi has a role in a diversified portfolio,” ECB board member Benoit Coeure stated. They are taking steps like this to ensure that their reserves are liquid and readily available.

As the euro faces declining use in the international marketplace, it still remains a very important currency in the international monetary system. However, with emerging currencies such as the Chinese renminbi, we might be seeing a shift in how much of the reserves continue to be held in euros.