The dollar is again facing questions about its status as the world‘s leading reserve currency. The dollar represents more than 60% of global reserves and is the currency most used for international transactions.
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However, runs the risk of giving way to the euro after European Union leaders agreed to a € 750bn ($ 860bn) stimulus package that improves the attractiveness of the common currency and euro-denominated assets, analysts at Crédito Agricole and Mizuho International Plc said.
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Wall Street strategists were already showing more enthusiasm about the shared currency, betting that it will strengthen as the global economy recovers from the pandemic and increases investors’ appetite for riskier assets.
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The strong correlation of the euro to equities suggests that it may increase as the recovery fund makes the region’s stocks more attractive. Also, according to the agreement, EU nations will jointly issue debt that could offer an alternative to US Treasury bonds as a safe haven.
The recovery fund “will facilitate the diversification of the US dollar by offering highly rated liquid debt denominated in euros”Credit Agricole’s Valentin Marinov said, adding that the dollar’s share of reserves could return to its lows from the early 1990s. The euro hit its highest level since January 2019 on Tuesday, and is up nearly 3 % this year.
The common currency still has some major hurdles to overcome before the dollar’s dominance weakens. About 85% of all foreign exchange transactions are against the dollar, while half of international trade is invoiced in dollars, according to the Bank for International Settlements. The euro only represents approximately 20% of the world‘s foreign exchange reserves. That figure peaked at 28% in 2009.
However, Ulf Lindahl, CEO of AG Bisset Associates and veteran of the forex market with over 40 years of experience, it projects that the euro will rise more than 30% against the dollar in the next 16 months. After surpassing $ 1.14 earlier this month, he is on a “clear takeoff path” against the dollar, and his outlook is “even stronger now,” he said.
Furthermore, if the recovery fund alleviates concerns that the eurozone might even split at some point, more euro economic activity will run, according to Peter Chatwell, head of multi-asset strategy at Mizuho. “In the medium term, the recovery fund represents a great challenge for the Treasury bonds and the dollar”, said.