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ECB Reports Slippage in the Euro's International Foreign Exchange Role

By Bill Camarda

Overall, the euro took a small step back as a global form of foreign exchange during 2016 and early 2017, according to the European Central Bank (ECB). The ECB attributed this slight decline in use of the euro by non-euro countries to lingering "heightened non-economic risks" associated with geopolitics, domestic elections within the Euro area, economic policy uncertainties on both sides of the Atlantic, and the continuing market impact of its own asset purchases.1

However, the euro remained firmly entrenched as the world's second most widely used currency – and some suggest its more recent foreign exchange rate strength may cause last year's modest decline to reverse.


According to ECB data, the U.S. dollar still holds nearly two-thirds of the global market for foreign exchange reserves, international debt and international loans, although its share of official foreign exchange reserves dropped by roughly 1 percent in 2016 and 5 percent since 2008.2 The percentage of foreign exchange held in currencies other than USD or the euro has gradually risen over the past several years, and ECB expects this trend to continue.3 (In June 2016, as if to emphasize this, the ECB moved €500 million (a little more than $555 million at the then-current exchange rate) of its reserves from dollars to yuan-denominated assets – a first for this central bank.4)


Slippage in Euro-based Loans, Debt, and FX Trades


The ECB's July 2017 report noted modest declines in the euro's global share of:


  • Outstanding amounts of international loans (down 0.2 percent at constant foreign exchange rates)
  • Issuance of foreign currency-denominated debt (down 4.4 percent at constant foreign exchange rates)
  • Daily FX trading (down 1.5 percent in 2016 from 2015)5

The ECB also reported a 3.1 percent decline in official shipments of euro banknotes to destinations outside the Euro area in December 2016 compared with a year earlier. But noted that the "actual circulation of banknotes outside the Euro area might be much higher" considering potentially unobserved cash movement.6


The Euro's share of outstanding international debt securities also fell in 2016, remaining "well below" levels prevailing before the 2007-2008 global financial crisis. The ECB observes that "heightened costs of ‘synthetic' US dollar borrowing have discouraged use of the Euro as a funding currency when borrowing US dollars in international debt markets, despite historically low levels of interest rates prevailing in the Euro area."7 Or, as Reuters puts it, some have been deterred from using the euro as a funding currency "due to the high cost of hedging against a fall in its value using swaps."8


Key Exceptions to the Downward Trend


ECB noted two important exceptions to the Euro's overall downward trend in 2016. Following several straight years of decline, its global share of official FX reserve holdings rose from 19.4 percent to 19.7 percent, offering "tentative evidence that the role of the Euro as an official store of value remained resilient."9 ECB says the Euro's growth as an FX holding may also suggest that the negative yields of some recent Euro-denominated bonds "did not undermine overall the Euro's status as an international reserve currency."10


The euro's share in international payments also increased from 29.3 percent in 2015 to 31.3 percent in 2016 after three annual declines; meanwhile, the U.S. dollar's share of payments dropped by 1 percent. The ECB notes that the euro's nominal effective exchange rate (NEER) versus key trading-partner currencies performed better in 2016 than in 2015, while USD performed somewhat less well. These developments might help account for the euro's relatively higher share of international payments in 2016.11


Effects of U.K. Exit and "Unofficial Euroisation"


Currently, 84 percent of euro-involved foreign exchange transactions begin outside the Euro area, and half of these are initiated in the U.K. This year's ECB report assessed whether Britain's coming exit from the EU might change this. Its conclusion: "The U.K.'s advantage as a hub for trading using fibre-optic cables, combined with institutional inertia, suggest that any relocation of trading after Brexit, if at all, would likely be gradual."12


The ECB also considered the phenomenon of "unofficial Euroisation," wherein people and companies in non-EU countries substitute the euro for their own currencies – primarily as a store of value, but sometimes also as a medium of exchange or unit of account. This has been widespread throughout the western Balkans, where "low confidence and high uncertainty are… reflected in a higher risk premium associated with the domestic currency," and hence higher borrowing costs, motivating businesses and individuals to use foreign exchange to obtain euros.13


As the ECB notes, "unofficial Euroisation may give rise to financial stability risks and constrain the effectiveness of monetary policy decisions" by these nations' governments. Hence, many of them are attempting to discourage use of foreign currencies. According to the ECB, they've made slow progress in reducing the share of loans denominated in foreign currencies, but less headway on the deposit side.14


What's Happened Since: Accelerating Euro Rebound


The ECB's annual report covers 2016 and includes some data through April 2017. Since then, however, the euro's value has soared. According to an August 2017 article in The Financial Times, euro foreign exchange rates "hit a two-and-a-half year high against the dollar in recent months and has risen by almost 5 percent against a basket of currencies since the middle of May."15


In late July, the ECB attributed the euro's foreign exchange strength to a reduction in political uncertainty within its region, the pricing out of earlier market expectations that changing U.S. government policies might lead to relative increases in U.S. interest rates, and "changes in relative fundamentals in the Euro area vis-à-vis the rest of the world." In fact, the ECB's leaders expressed concerns "about the risk of the exchange rate overshooting in the future."16 If the euro does remain strong, some of the euro's recent downward trend as a means of international foreign exchange could well shift in next year's report.


As Dow Jones News Wires reported in July, "Three-month euro-dollar risk reversals, which measure the cost of hedging against drops in currencies, broke into positive territory at the end of June for the first time since at least 2010. A positive figure suggests investors are no longer asking to be paid a premium to hold euros, a sharp change from the recent past."17 The changes may have some investors reconsidering euro foreign exchange hedging strategies they tended to avoid in recent years.18


Carl Hammer, head of global macro and foreign exchange research at Swedish bank SEB, told Dow Jones that with political threats to the euro receding, "from a historical perspective the rest of the world is underweight Europe."19 Greater confidence in the euro might lead central banks to stock up on euros.20 A strong euro would impact businesses that operate in the currency – increasing the value of euro-based purchases outside the Eurozone, while making euro-based products and services more expensive to those outside the zone.



The ECB reports continuing slippage in the international role of the euro in 2016, but that currency's recent foreign exchange strength may be changing the way international organizations view it, and use it.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.


1. The international role of the Euro (July 2017), European Central Bank;
2. Ibid.
3. “Indicators of international use of the euro developed unevenly in 2016,” European Central Bank;
4. “ECB gives renminbi its forex seal of approval,” The Financial Times;
5. The international role of the Euro (July 2017), European Central Bank;
6. Ibid.
7. Ibid.
8. “Global use of Euro declines further on political risk: ECB,” Reuters;
9. The international role of the Euro (July 2017), European Central Bank;
10. Ibid.
11. Ibid.
12. Ibid.
13. Ibid.
14. Ibid.
15. “ECB minutes reveal concern over Euro strength,” The Financial Times;
16. “Account of the monetary policy meeting of the Governing Council of the European Central Bank, held in Frankfurt am Main on Wednesday and Thursday, 19-20 July 2017,” European Central Bank;
17. “Long the Crisis Currency, This Euro Surge Could Last,” Dow Jones News Wires;
18. “FX: Stronger Euro prompts investors to reconsider hedging,” Euromoney;
19. “Long the Crisis Currency, This Euro Surge Could Last,” Dow Jones News Wires;
20. Ibid.

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