A report from the European Central Bank indicated that the euro’s share of foreign exchange reserves declined by one percentage point to 20% in 2023. According to the report, the continued diversification of global reserve portfolios into nontraditional currencies threatens to further erode the euro’s share of foreign exchange reserves.
Euro’s Reserve Currency Status Threatened as Its Share of Foreign Reserves Holdings Drops
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Euro’s Decline Coincides with US Dollar’s Rise
A new report by the European Central Bank (ECB) indicates that the euro’s status as a reserve currency is at risk after its share of foreign exchange holdings dropped marginally in 2023. The report cautions that this share could decline further as Russia, which has been pushing for an alternative reserve currency, reduces its euro reserves.
To underscore the ECB’s concerns, the report disclosed that the eurozone currency’s share of foreign reserves fell by one percentage point to 20%. This level was last observed in 2020. By comparison, the shares of foreign reserves for the U.S. dollar and the Japanese yen increased by 0.3% to 58.4% and 0.6% to 5.7%, respectively.
Additionally, the report highlighted the growing diversification of global reserve portfolios into nontraditional reserve currencies, including the Australian dollar, the Canadian dollar, the Korean won, the Singapore dollar, the Swedish krona, and the Norwegian krone.
Chinese Renminbi Emerges as Alternative Regional Reserve Currency
Regarding global payments, the ECB report indicated that the euro’s role remained stable, with no structural shifts in the value of euro payments processed between banks in the eurozone’s real-time gross settlement (RTGS) system.
“This indicates that the global reach of euro payments remained stable in contrast to the share of the euro in global payments processed in Swift – a global messaging network used by financial institutions – which suggests a notable decline in the course of 2023,” the ECB said.
The ECB report also observed that, while Russia attempted to promote the ruble as a “leading vehicle currency” in an evolving regional payment landscape, it is the Chinese renminbi that appears to have assumed this role. For example, the report cites India’s decision to use the renminbi, not the rupee, to pay for Russian crude oil.
The report further discusses the potential role of crypto assets in global payments and certain countries’ attempts to introduce crypto-based payment systems.
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