Europe may increase euro reserve holdings due to tensions

A shift in transatlantic relations could change how countries hold their currency reserves. The growing tension between the U.S. and its traditional allies in Europe raises questions about the dominance of the dollar versus the euro. Many countries still rely on the dollar, which makes up 57% of global central bank reserves. The dollar benefits from strong, transparent markets and its widespread use in international trade. However, a study highlighted concerns about the reliance on dollar reserves, particularly after the U.S. froze Russia’s assets in response to its invasion of Ukraine. This study found that three-quarters of foreign U.S. dollar holdings are from countries with military ties to the U.S. Although these ties have evolved, U.S. allies still hold significant reserves in dollars. The potential for dollar divestment is estimated around $800 billion, but moves away from the dollar would not eliminate its status as a reserve currency. Recent developments in Europe, particularly in defense spending, indicate a desire to shift responsibility from the U.S. military. This could prompt European nations to rethink their dollar reserves and payment systems. European Central Bank officials express concerns about relying on American financial systems, suggesting a move toward a new, multipolar monetary system. The euro holds a stable 20% share of global reserves, and further European unity in public debt could strengthen its appeal as a reserve currency. While the Chinese yuan remains a minor player, the emerging dynamics may favor increased euro use in the future, especially as U.S. relations appear less predictable.