Euro expands but can it surpass the greenback?

The euro, a decade later, has become the currency of 15 member states with a total population of about 320 million and is the world's second most important international currency after the US dollar.

As the US dollar has declined sharply, there is a question about how long it can remain the world's premier currency and whether the second-biggest currency can overtake the greenback's role.

 European Central Bank reports have confirmed that the euro is increasingly challenging the dollar's predominance. The use of the euro has increased over the past several years in international debt security markets, global official foreign-exchange reserves and as a trade invoicing and settlement currency.

Euro-denominated international debt securities have surpassed those of the dollar since 2004. The euro's worldwide share of official reserves has risen from 19 per cent in 1999 to more than 25 per cent as central banks around the world, particularly in Asia, have gradually switched currency in their official reserves from the US dollar to the euro following the former's depreciation.

The euro's share in global official foreign reserves (the currency composition of which is known) was around 25 per cent at the end of December. This was considerably higher than the corresponding share of the sum of all legacy currencies at the end of 1998, which accounted for about 18 per cent. However, no official statistics are available on the currency composition of about one-third of global foreign-exchange reserves, since a number of countries with large holdings of reserves - mostly in Asia - do not disclose their composition by currency.

Interestingly, the share of the euro in the total official foreign-exchange reserves held by the emerging-market economies that provide the relevant statistics rose from around 18 per cent in 1999 to about 28 per cent at the end of 2007.

Even though the euro's role as an international currency continues to expand, replacing the dollar as the world's premier's currency has never been the EU's mission. "I don't think we have this ambition to overtake the US dollar. We have a neutral attitude. We don't promote the use of the euro as foreign reserves. The EU tries to remain competitive and a dynamic area," said Amelia Torres, spokeswoman of the EU commissioner for Economic and Monetary Affairs.

oranan@nationgroup.com