Euro's role as reserve currency: a missed opportunity? - Commerzbank

The dominance of the US Dollar (USD) is based on its use in cross-border transactions by third countries - i.e. its use as a so-called vehicle currency. According to data from the payment service provider SWIFT, the share of the USD in international payment transactions recently totalled around 60%, whereas the number 2, the euro, appears to be far behind at 13%, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen reports.

Euro still struggles to rival the USD

"The single currency came very close to challenging the Greenback for first place. At the end of 2017, the corresponding EUR share in the SWIFT data was just 2 percentage points below that of the USD. Since then, the US currency has of course extended its lead again, recently even considerably. However, the ECB points out that the significant decline in the EUR share since spring 2023 could be due to technical factors - in this respect, the SWIFT data should perhaps now be viewed with caution."

"But back to the fact that the euro could well become a competitor to the US dollar in international payment transactions. In 1973, the economist Sven Grassman publicised his observation that trade in industrial goods was generally settled in the exporter's currency. He explained the dominance of the dollar in world trade at the time with the US's high share of world exports (Grassman's Law). This explanation could also be applied to the eurozone, which is now responsible for a high proportion of global exports. This basically gives companies in the eurozone a good negotiating position to push through the euro as the invoicing currency."

"The timing of the temporary significant increase in the share of EUR in international payment transactions was significant. This occurred in the year in which Emmanuel Macron was elected President of France. In his election campaign at the time, Macron campaigned in favour of greater integration of the eurozone. From the perspective of many investors, this obviously reduced the risks associated with the euro. However, disillusionment quickly set in again after his election. A currency that is exposed to the risk of a break-up of the currency area obviously finds it difficult to assert itself as a vehicle currency. And so it remains the case that replacing the US dollar is likely to prove difficult, even if it is not completely unrealistic."