Money

Eurozone must seize the dollar’s declining reserve currency role – Natixis

The perceived quality of the dollar has been declining since early 2020. This gives the euro zone an opportunity to increase the reserve currency role of the euro which would allow the euro zone to boost its investment, not only by retaining its own savings but also by borrowing from the rest of the world, per Natixis.

Key quotes

“We are now seeing a definite decline in the reserve currency role of the dollar. This can be seen in the recent depreciation of the dollar against all currencies and the reduction in capital flows to the US.So the dollar has certainly lost some international appeal.”

“The dollar’s declining international reserve currency role provides the euro zone with the opportunity to increase the euro’s reserve currency role. But to do this, the euro zone must provide investors with a sufficiently large single debt issue, not segmented debt issues as is the case today. There would be a need to go well beyond the EU’s €750 billion of debt arising from the European recovery plan.”

“The US benefits from the dollar’s reserve currency status by financing some of its investment with external debt obtained at a very low-interest rate. In contrast, the euro zone has an external surplus and therefore lends some of its savings to the rest of the world, in particular the US. If the euro zone made the most of the euro’s reserve currency status, like the US, it could also use external debt to boost its investment.”

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Source
fxstreet

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