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The euro’s share of global foreign exchange holdings fell last year amid concerns that plans to use frozen Russian assets to finance Ukraine could further erode the appeal of Europe’s single currency.
Other countries cut euro assets in their central bank reserves by about €100bn last year, a drop of nearly 5 per cent, the European Central Bank said in a report published on Wednesday.
That reduced the single currency’s share of global foreign exchange reserves to a three-year low of 20 per cent.
Recent moves by Swiss and Japanese institutions to support their own currencies against the risk of depreciation meant they sold some of their euro holdings, the ECB said. But that did not harm other crucial reserve currencies such as the US dollar and Japanese yen, it said, which increased their share last year.
Russia keeps about 40 per cent of its official foreign exchange assets in euros, an unusually high proportion, which equates to about 8 per cent of the total global reserves held in Europe’s single currency, the ECB said.
About $300bn of Russia’s foreign exchange reserves were frozen by international sanctions after its full-scale invasion of Ukraine in 2022, and G7 leaders are discussing plans to mobilise these assets — the bulk of which are in euros — to provide extra financing to Ukraine.
The ECB highlighted the risk that tensions with Russia could have an impact on the euro, saying: “Sanction-related measures might be relevant to the share of the euro in global foreign exchange reserves going forward.”
Representatives of national parliaments’ foreign affairs and European committees — including those in Germany, the US and UK — called for world leaders to seize all of Russia’s frozen assets in a letter to the Financial Times published on Wednesday.
“The ultimate objective must be to fully confiscate all Russian assets and transfer them to Ukraine, ensuring that this process adheres to international law,” the letter said.
The plans under discussion focus on using future profits from the frozen assets to back debt to fund Ukraine, rather than seizing them outright.
The ECB has consistently warned that an outright seizure risks harming the euro’s international role. Italy’s central bank governor Fabio Panetta said earlier this year that “weaponising” the single currency could hurt its attractiveness.
The euro’s role as the world’s second-largest reserve currency behind the US dollar confers important benefits to the Eurozone as it allows members of the single currency bloc to issue debt more cheaply.
However, the euro’s share of global foreign exchange reserves has declined from 25 per cent two decades ago, as countries have switched to holding a greater share of other currencies, such as the Chinese renminbi, the Australian dollar and Korean won. In the same timeframe, the US dollar’s share has fallen from close to 70 per cent to just below 60 per cent.
The ECB said an index of the euro’s international usage fell 0.7 percentage points last year at constant exchange rates. But it said the reading was “broadly stable” at current exchange rates.
It cited an HSBC survey of central banks that found the Eurozone’s weak growth prospects were a factor “hindering investment in euro-denominated assets” as well as a lack of supply of highly rated assets and centralised debt issuance in the bloc.
Some countries, such as China, Russia and Iran, are seeking to use their own currencies more for international trade, establishing local alternatives to the Swift system for international payments.
Piero Cipollone, an ECB board member, wrote in the FT that the Eurozone could link its instant payment system with similar networks in other countries “to further develop the infrastructure for making cross-border payments in euro with key partners”.
ECB president Christine Lagarde said the euro’s international role “should not be taken for granted”. She added: “Although the data so far show no evidence of substantial changes in the use of international currencies, we need to remain vigilant to any cracks that start appearing.”
