The Euro's Moment: Can Europe Challenge the US Dollar?

Strategic Insights -

The policy choices of the Trump administration have left the US dollar's global reserve status in doubt, prompting a growing question: what will take its place? The gold bugs, once dismissed as conspiracy theorists, are now vindicated by signs that the dollar's haven function is faltering. The latest blow came when Moody's downgraded US government debt, sending 30-year yields above 5 per cent and straining Treasury markets.

Key Takeaways:

  • The US dollar's global reserve status is increasingly uncertain due to the Trump administration's policy choices.
  • The Moody's downgrade of US government debt has strained Treasury markets, making the dollar's haven function more vulnerable.
  • European officials are aware of the opportunity to challenge the US dollar with the euro, but making it happen is difficult.
  • Academics Jens van 't Klooster and Steffen Murau have proposed a "how to build a reserve currency" guide, highlighting the euro's potential in global trade and payments.
  • European authorities should be more proactive in promoting the euro as a unit of global trade and encouraging its use in supply chains.
  • Euro swap lines, euro invoicing, and facilitating euro use in clean energy exports and technology services can enhance the euro's global role.
  • Building a joint European bond market denominated in euros would require significant cooperation among member states and would involve industrial amounts of arguing.
  • The euro's internationalization has been hindered by European policies, which have discouraged the expansion of offshore euro creation.

Statistics:

  • 80% of Europe's energy import bill is paid for in US dollars, worth €300bn a year (Jean-Claude Juncker, 2018).
  • Only 2% of Europe's energy imports come from the US (Jean-Claude Juncker, 2018).
  • 30-year US Treasury yields are above 5% following Moody's downgrade.
  • €300bn is the worth of Europe's yearly energy import bill paid in US dollars.
  • 80% is the proportion of Europe's energy import bill paid in US dollars.

Sources:

  • S&P Global Ratings (2011) - S&P became the first of the three big agencies to downgrade Uncle Sam.
  • Moody's (2023) - Moody's downgraded US government debt, stripping the US of its coveted triple A rating.
  • Jens van 't Klooster and Steffen Murau (paper) - Proposed a "how to build a reserve currency" guide, highlighting the euro's potential in global trade and payments.
  • Jean-Claude Juncker (2018) - European Commission president lamented Europe's slow progress in promoting the euro as a unit of global trade.