Euro’s Share in Forex Holdings Declines, ECB Raises Concerns

The share of the euro in foreign exchange holdings fell by one full percentage point to 20% in 2023, according to the European Central Bank (ECB). This decline has been attributed to the rising popularity of the US dollar, Japanese yen, and other non-traditional reserve currencies. In particular, official investors have been purchasing yen-denominated reserve assets to offset the yen’s depreciation over the review period.

The ECB also estimates that the Swiss National Bank’s euro-denominated reserves fell by 35 billion euros, primarily due to its intervention in support of the Swiss franc. Despite rising interest rates in the euro area, this has not improved the currency’s attractiveness because rates are higher in many other places and because of the euro zone’s muted economic prospects.

The report also highlights concerns about Russia’s plans to reduce its euro stockpile, which could further impact the currency’s status in global foreign exchange reserves. The Central Bank of Russia held around 8% of global reserves in euros before they were immobilized in 2022.

The ECB has repeatedly expressed concern about plans to use Russian assets stranded in Europe to help Ukraine, fearing that others may then start doubting the security of their euro holdings. ‘Weaponizing a currency inevitably reduces its attractiveness and encourages the emergence of alternatives,’ said Bank of Italy Governor and former ECB board member Fabio Panetta earlier this year.

The ECB has long argued that the European Union must take another leap in financial integration if it is to reverse the declining trend of the euro’s share in foreign reserves. However, respondents to a recent survey of 91 central banks cited weak growth prospects in the euro area, lack of supply of highly rated assets, and centralized debt issuance as potential factors hindering investment in euro-denominated assets.

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