Corona Virus
Stay Safe, FollowGuidance
Fetching Location Data…
Levon Kameryan

Download full report (on the Scope Ratings website).

EU and Chinese governments will have to do more to promote international use of their respective currencies. If and when they do, a shift from the dollar to the euro or renminbi might take place more precipitously than currently thought possible, says Levon Kameryan, analyst at Scope.

“Greater use of the euro and renminbi would grant EU and Chinese governments more monetary, financial and political autonomy while fostering a more stable international financial system by providing credible alternatives to the dollar,” says Kameryan.

The use of an international currency extends well beyond its role as a foreign exchange reserve for central banks. It fulfils the three traditional functions of money for both private and public actors: a medium of exchange, a unit of account, and a store of value.

“The dollar has dominated these areas for several decades, conferring considerable advantages for the US (rated by Scope an under consensus AA) in terms of public debt sustainability as well as economic and political leverage, and leading to inertia against the possible adoption of alternative currencies,” says Kameryan.

Rivals to the dollar in the future?

The euro is perhaps the most plausible rival for the dollar given the weight of euro area countries in world GDP (15%) and trade (25%), as well as member states’ growing prominence in global capital markets.

Several developments already point to a greater reliance on the euro, such as: the upgrade of the ECB’s payment systems infrastructure; Rosneft’s and Novatek’s (the biggest Russian oil and liquid gas producers) decision to switch to the euro from the dollar for all exports; and the European Commission’s work towards strengthening the international role of the euro, which includes active consultations with private and public market participants.

Tighter EU and euro area financial-sector integration, through completing the Capital Markets and Banking unions, would increase the attractiveness of euro-denominated assets. The availability of safe assets, which would greatly benefit from the creation of a euro area common debt instrument – such as a “eurobond” or sovereign backed bond securities – is also key in achieving more widespread adoption of the euro.

Negotiations around a Next Generation EU recovery fund for 2021-24 go in this direction.

For Chinese authorities, the further opening of capital accounts to foreign investors, progress in enhancing the supervision and reduction of financial vulnerabilities, strengthening of the rule of law and improved sovereign creditworthiness will be key to raising the renminbi’s international appeal.


So far, only gradual signs of dollar’s decline

So far, there have been gradual signs only of the dollar’s diminished dominance.

  • Foreign exchange reserves: dollar-denominated assets currently represent about 61% of global allocated reserves, though this share has fallen from above 71% in 1999. The euro’s share is much smaller at only 20.5% of holdings, after peaking in 2009 at 28%. The use of the renminbi, though marginal today, has almost doubled over the past three years to 2%.
  • Currency choice for central banks: The share of IMF member countries that adopt the dollar as an exchange-rate anchor has declined to 19.8% in 2018 from 26.5% in 2010.
  • Energy-market transactions: the dollar is the dominant currency in the energy sector but trading volumes in Shanghai crude oil future contracts denominated in renminbi, launched in 2018, have at times been not too far off from those of the Brent or West Texas Intermediate.

Current US policies could reduce dollar reliance

US foreign and trade policies may also incentivise governments to reduce their reliance on the dollar while the country’s persistent fiscal and current account deficits in a highly politically polarised environment may gradually weaken investor confidence in the currency.

Investors and policymakers alike should assess the risks and prepare for the possibility of a reduced role for the dollar in coming years or decades.

“It makes sense to take action today to protect against the possibility, even if it looks remote for now, of a sudden loss in confidence in the dollar, which could lead to a global liquidity crisis with severe economic consequences without an alternative global currency in place,” says Kameryan.

For a look at all of today’s economic events, check out our economic calendar.

Levon Kameryan is Analyst in Public Finance at Scope Ratings GmbH.

Don't miss a thing!
Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Trade With A Regulated Broker

  • Your capital is at risk
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.