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United States : Signs of a turnaround in the international use of the euro

July 17, 2014

The euro area attracted more foreign investment last year than in the year before, but the share of the euro in foreign exchange reserves and its role as currency in international financing slightly declined. These are among the main findings of the report on The international role of the euro , which examines developments in the use of the euro by non-euro area residents in 2013 and was published today by the European Central Bank (ECB).

The report finds that, in an environment of improving market sentiment towards the euro area, various indicators used to assess the international use of the euro turned to or remained in positive territory in 2013. In particular, international investors interest in euro area securities, which are mostly denominated in euro, grew markedly over the course of the year. Specifically, foreign demand for euro area portfolio investments (debt securities and equities) reached its strongest level since the onset of the financial crisis in 2007, amounting to 3.7% of euro area GDP, compared with 3.0% in 2012. These capital inflows reflected both domestic and external factors, including improving euro area macroeconomic fundamentals, a further reduction in perceived tail risks, and a rebalancing of international investors away from emerging market securities. Sustained capital inflows to the euro area were mirrored in a broad-based and steady strengthening of the euro exchange rate, which appreciated by 7% in nominal effective terms in 2013, the second largest appreciation since 1999.

Also other indicators of the international use of the euro turned to or remained in positive territory in 2013. Foreign demand for euro banknotes increased for a third consecutive year and the sovereign debt crisis had no impact on the use of the euro as parallel currency in central, eastern and south-eastern Europe.

The report also observes that the international use of the euro declined in other market segments. The euro s share in global foreign exchange reserves decreased by 0.9 percentage point (at constant exchange rates) in 2013 to 24.4%. This notwithstanding, the euro continued to perform its function as a credible store of value for foreign central banks as the second most important international reserve currency. As regards international debt markets, the share of the euro as an international financing currency declined by 1.4 percentage points (at constant exchange rates), to 25.3%. In this market segment, the euro s share decreased in tandem with that of the Japanese yen and those of the other currencies.

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Source: TendersInfo (India)

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