The US dollar’s dominance will continue to erode in 2024, with smaller currencies such as the Japanese yen and the Canadian dollar, as well as gold, emerging as the main beneficiaries. A report by the European Central Bank (ECB) showed that global reserve holdings in dollars fell by two percentage points, bringing the total to 58%, a 10 percentage point drop in a decade. While the euro has made a slight increase, it remains below one-fifth of global holdings. Gold, meanwhile, has seen its highest ever central bank purchases, exceeding 1,000 tonnes over the past year.
ECB President Christine Lagarde has described the situation as a significant opportunity for the euro, should the bloc take integration steps such as issuing common debt. While there are signs that the euro is starting to attract investors, including the euro’s exceptional performance against the US dollar despite rising US Treasury yields, the lack of large-scale, truly liquid safe-haven assets remains a major obstacle. The ECB also highlighted that investors are now demanding a higher risk premium to hold US assets, reflecting doubts about the dollar’s status as the world’s leading currency.
However, the fragmented structure of Europe’s financial markets remains a major challenge. Government bonds are still issued by individual member states, leaving the eurozone debt market fragmented. Renowned economists such as Olivier Blanchard have proposed a system of common bonds (‘blue bonds’) and national bonds (‘red bonds’) with separate revenue streams. The ECB’s Chief Economist, Philip Lane, has also proposed a eurozone synthetic bond as an alternative, but this is still at the proposal stage.
Furthermore, the lack of a capital markets union and military strength within the EU undermine the euro’s appeal as a global reserve currency. The ECB has stressed that these structural disparities make it difficult for the euro to compete seriously with the dollar in the long term. While recent data show little progress, only concerted action and deep reforms can make the euro truly competitive as a major global currency.
