The euro is a key global currency which has an important role in international financial markets. It is used widely by third-country governments and private actors worldwide as a currency of choice for their reserves, their borrowing and for trade.
Advertisement
The euro is an attractive currency for the international financial markets because of the size of the euro-area economy, its openness to trade with the world, its commitment to prudent economic management, and the clear mission of the European Central Bank to run a monetary policy that ensures price stability.
These factors give international financial markets the confidence to use the euro widely, alongside the US dollar, in a range of financial instruments:
- International debt markets
- International loan and deposit markets
- Foreign exchange markets
- International trade
- Reserves and anchors
Third countries wishing to raise large amounts of money can do this by issuing bonds that are repaid with interest at a fixed future date. Large institutional investors, such as pension funds, usually buy such bonds because they are seen as low-risk investments. When a country issues bonds in a foreign currency, they are known as sovereign bonds. Large private corporations can also issue corporate bonds in a foreign currency to fund their operations and investments. Such bonds are traded on international debt markets. At the end of 2006, the share of euro-denominated debt in international debt markets was 31.4%, while the US dollar comprised 44.1%.
Banks make loans and accept deposits across the world in various currencies which form the international loan and deposit markets. This lending and borrowing involves countries and corporations worldwide, for example a corporation borrowing to fund new investments in a developing country, or a government placing oil revenues on deposit with a bank until needed. The euro is playing an important role in these markets. In December 2006, euro-area bank lending to non-bank institutions outside the euro area was denominated at 36.3% in euro and 44.8% in US dollars.
Foreign exchange (forex) markets are those where currencies are traded for others. The euro has become the second most actively traded currency in forex markets. At the beginning of 2007, it was a counterpart in around 37% of the daily transactions, compared to a share of 86.5% for the US dollar, 16.5% for the Japanese yen and 15% for the pound sterling (both sides of transactions are counted so that shares add up to 200%).
The euro is increasingly used by euro-area Member States as the currency of settlement and invoicing in international trade. In the first quarter of 2006, in most euro-area countries where data was available the average share of the euro in euro-area exports of goods to countries outside the EU was around 50% slightly surpassing the US dollar, which is used in around 44% of the transactions in terms of value whereas in imports of goods the euro’s share was around 35%. To a much smaller extent, the euro is beginning to be used as a ‘vehicle currency’ for trade between third countries, although the US dollar is still dominant in this. As the euro area constitutes the largest trading block and one of the most open economies in the world, the use of the euro in international trade can be expected to grow in the future.
As a major currency, the euro is used as an anchor currency by some third countries to manage their own exchange-rate regimes. For example, Russia uses the euro as part of a basket of currencies for the daily management of the rouble exchange rate. In addition, the euro is increasingly held as a reserve currency by third countries because they have confidence it will maintain its value. The share of the euro in global foreign exchange reserves is over 25% (mid 2007) and close to 29% in developing countries, which have increased their reserves significantly from 18% held in 1999. In comparison, the US dollar accounts for around 65% and the pound sterling for around 4.5% of global currency reserves.
The establishment of the euro area also created the second largest currency area in the world. On international markets, the euro is the second most important international currency after the US dollar. The size and stability of the euro-area economy and the liquidity of its financial markets make holding and using the euro attractive to third countries as an alternative to US dollars helping reduce the risks of currency fluctuations and contributing to global economic stability. The euro-area Member States also benefit, as trading in euro becomes more widespread. Further, the importance of the euro gives the euro area a stronger voice on the international stage.
Source: European Commission
