Sunday, August 23, 2020

Will the Euro Replace the US Dollar as the World's Reserve Currency?

The euro is becoming the go-to currency for safety and liquidity as we approach the U.S. presidential elections and investors bet on a rocky time for the dollar, writes Marcus Ashworth for Bloomberg.

With signs that hedge funds are taking option exposure on a rising euro, the recent move into the single currency could easily turn into an investor stampede if dollar flight takes hold, Ashworth adds.

He has a point. Here is a long-term chart of the dollar versus the euro:

But most interesting is that the European Central Bank has been pumping money into the system since the start of the COVID-19 lockdowns but it is nowhere near what the Fed is pumping out.

The blue line is Federal Reserve mad money printing on a 12-month percentage basis the orange line is European Central Bank money printing for the same period.

Based on simple supply and demand analysis (and this is a short-cut not taking into consideration all the complexities of international trade), there have been a lot more dollars pumped into the system compared to euros which suggests downward pressure on the dollar.

It is extremely unlikely that the euro would replace the dollar as the global reserve currency, at least in the near term, but some type of move in the direction of the euro by central banks around the world is not going to be pretty for the value of the dollar.

If the dollar decline picks up momentum on the downside, it could be quite the sight to see. A move against global reserve status, even a minor one, could send dollars flying back into the United States adding strong upward pressure on prices in the US.


1 comment:

  1. I was going to note that one issue with the Euro becoming the reserve currency is that the EU could well break up in the next decade or so, and this would create doubts about the Euro, but then of course the US could break up too (he says hopefully).