Global currency in flux; pressure on the dollar, opportunities for the euro

The economic panels on the global stage have been considerably in motion these past months. Most important trigger is the policy of the American president Trump. The turmoil is so significant that the future of the dollar as a global currency is openly doubted. We made a phone call to Frank van Weegberg for an interpretation of these developments. 

What is the importance of having a reserve currency for the worldwide economy?

“A broadly accepted means of payment first of all is very important for the mutual trade. It greatly simplifies the international trade. Not just as a means of payment for transactions between countries, but also as a currency expressing international prices, like the ones of raw materials. The dollar is predominant in this respect. Gold, oil, the fees of cargo ships: all paid in dollars. That will not have changed in one or two years’ time. However, there are some developments. Countries that have become much more powerful, such as China, are now also able to buy oil in Qatar, Saudi Arabia and Russia in renminbi. That is rather striking, as this only used to be possible with dollars. 

A world currency is also essential for investors, especially in troubled times like today. In these cases, investors always divert to the so-called safe haven currencies, such as the Japanese yen, the euro, the Swiss franc and the American dollar. Even though the dollar is still by far the most important currency for investors, the uncertainty is growing and the confidence decreases. It is important for a world currency that, among other things, the country in which the currency is used as a means of payment has a stable legal system. In other words: an impeccably functioning constitutional state with an independent central bank. And the latter is the problem here. Trump is not happy with the chairperson of the Federal Reserve (Fed), the central bank of the United States. If he fires this Jerome Powell and replaces him with a puppet of himself, that will damage the confidence in the Fed and, with that, in the dollar as safe haven.

And then there are the central banks that all have reserves in the form of gold, for example. But they also hold reserves in safe currencies, such as the dollar. At the moment, around 20 percent of the reserves of central banks consist of euros as opposed to 60 percent in dollars. The remainder consists of smaller currencies, such as the Swiss franc, the Japanese yen and the British pound. The dollar is predominant here as well, but the proportions are shifting. Lately, a trend can be observed that countries in Asia, for example, purchase less dollars and more gold. That is the reason why the price of gold has risen this rapidly.”

So, plenty of dynamics with the dollar under pressure as a broadly accepted currency. How realistic is it to expect for the euro to play a bigger role on the global stage?
“The euro meets the most important conditions to be a reserve currency. The previously mentioned stable constitutional state is present, with an independent central bank in the form of the European Central Bank (ECB). In addition, Europe is a continent with a significant trade market. Moreover, it allows for the free movement of capital. That is not possible in China, which stands in the way of a bigger role for the Chinese renminbi. In short, the conditions are present.

However, to acquire a stronger position, Europe has to start consuming more and invest more abroad. That could very well happen due to the ageing population. This results in us producing less in Europe. To still be able to meet the demand, more goods have to be imported from other countries on other continents. The euros these countries receive from us, can then be invested in safe German government bonds or strong European equities.

And there is yet another development observed that strengthens the position of the euro. The war in Ukraine has brought Europe closer together. There is the intention to jointly invest in defense and in the infrastructure for the energy transition. This step makes us interesting for loans.

All of this could well change the proportions in the future. The euro more and more becomes a hard currency and might even grow from 20 percent of the reserves of central banks to 30 or even 40 percent. But that takes a long time as past experience has shown.”

How does the Netherlands benefit if the euro becomes an internationally accepted world currency?
“A great deal. If we have a deficit in the government’s budget and the euro is the safe haven currency, it is much easier for the Netherlands to issue many government bonds. There is always someone willing to purchase that government bond as it is considered a safe haven. Furthermore, it will be much easier for the Netherlands to finance debts abroad. And it is beneficial to the trade. When companies are listed on the stock exchange in euros, it increases the confidence of investors. Or in case they want to borrow money to invest, that will become a lot easier abroad.”