A recent report from the European Central Bank (ECB) highlights a concerning trend: the euro’s share of global foreign exchange reserves has decreased by one percentage point, dropping to 20% in 2023. This decline underscores the ongoing diversification of global reserve portfolios into nontraditional currencies, potentially further diminishing the euro’s prominence in foreign reserves.
Euro’s Decline Coincides with US Dollar’s Rise
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According to the ECB report, the euro’s status as a reserve currency is under threat following a slight decline in its share of foreign exchange holdings in 2023. The report warns that this share may continue to shrink, particularly as Russia seeks to reduce its euro reserves in favor of an alternative reserve currency.
To illustrate the ECB’s concerns, the report notes that the euro’s share of global foreign reserves fell to 20%, a level last seen in 2020. In contrast, the US dollar and Japanese yen saw increases in their shares, with the dollar rising by 0.3% to 58.4% and the yen by 0.6% to 5.7%.
Additionally, the report emphasizes the trend of global reserve portfolios increasingly incorporating nontraditional reserve currencies, such as the Australian dollar, Canadian dollar, Korean won, Singapore dollar, Swedish krona, and Norwegian krone.
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Chinese Renminbi Emerges as an Alternative Regional Reserve Currency
Regarding global payments, the ECB report indicates that the euro’s role has remained stable, with no significant shifts in the value of euro payments processed within the eurozone’s real-time gross settlement (RTGS) system.
“This stability in the global reach of euro payments contrasts with the notable decline in the euro’s share of global payments processed via Swift – a global messaging network used by financial institutions – throughout 2023,” the ECB stated.
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The report also highlights Russia’s efforts to promote the ruble as a “leading vehicle currency” within a developing regional payment system. However, it is the Chinese renminbi that appears to have taken on this role. For instance, India has chosen to use the renminbi, rather than the rupee, to pay for Russian crude oil.
Furthermore, the report explores the potential impact of crypto assets on global payments and various countries’ initiatives to implement crypto-based payment systems.
