The U.S. dollar continues to be the world’s dominant currency, accounting for three-fifths of central bank reserves and serving as the primary transaction currency for key commodities like oil, a status that provides the U.S. government with significant financial leverage. According to a Yahoo Finance report, this position was underscored by President Donald Trump’s July statement: “Dollar is king and we’re going to keep it that way.”

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The euro, while a distant second, maintains a substantial global role, accounting for approximately 20% of both global central bank reserves and trade invoicing. The currency has strengthened about 13% against the dollar this year, reaching a four-year high. Data from the IndexBox platform indicates that investor consensus points to further potential gains for the euro as the U.S. Federal Reserve begins a cycle of interest rate cuts.

Obstacles to a Stronger Euro

European leaders recognize that bolstering the euro’s international status could shield their export-driven economies from protectionist policies and growing economic tensions under the current U.S. administration. A greater use of the euro in trade and reserves would help insulate the bloc from volatile exchange rates, capital flows, and even potential economic sanctions.

However, progress is stalled on three critical fronts. There is a need to create a larger stock of safe euro-denominated assets for investors. The current stock of outstanding euro area government bonds is approximately $13 trillion, which is dwarfed by the $30 trillion U.S. Treasury market. While German government paper is considered a safe bet, the same cannot be said for bonds from Italy or politically troubled France. The European Union’s capital market remains fragmented along national lines and lacks a truly large, liquid safe asset.

Secondly, the project to complete Europe’s economic and monetary union through a capital markets union faces significant resistance. Efforts to align national rules on bankruptcies, public offerings, and taxes have seen patchy progress, with many EU capitals and bankers wary of shifting decision-making power to EU agencies.

Finally, Europe is lagging in its response to the challenge of digital currencies. A legislative proposal for a digital euro has been idle for over two years. Banks and lawmakers have expressed concerns about the project draining deposits and incurring high costs without a clear purpose. A recently agreed roadmap sets the earliest approval date for mid-2026, with a further 2.5 to 3 years needed to build the technology.

Geopolitical Rivalry and the Yuan

Amid entrenched resistance to these reforms, the euro is not expected to rival the dollar’s dominance in the near future. The question remains whether it can solidify its position as the world’s number two currency. A survey of 75 central banks showed that 16% plan to increase their euro holdings over the next 12-24 months. However, the primary beneficiary of diversification away from the dollar has been gold, not a currency.

In the long term, China’s yuan is favored by more central banks as a challenger. Some officials, such as a Central Bank of Mongolia board member, have suggested that the ECB needs to create more tools and swap arrangements for Asian central banks to make investing in Europe more attractive. The ECB currently has liquidity lines with 16 central banks, mostly in Western countries.

Source: IndexBox Market Intelligence Platform