For decades, the US dollar has held a virtually unchallenged position as the world’s primary reserve currency – a status granting the United States considerable advantages, from lower borrowing costs to outsized influence in global markets.
As the global economic order shifts and new centres of power emerge, the question of which currencies will dominate the future looms large and the dollar’s supremacy should no longer be taken for granted. Rising geopolitical tensions, the desire of US President Trump’s administration to rebalance the global economy, along with growing concerns over the level of US government debt are leading financial markets to reassess the dollar’s role in the financial system.
The euro is emerging as a credible alternative and the European Central Bank (ECB)’s independence along with the rule of law may provide the euro with an edge over the dollar over the longer term. Three avenues should strengthen the second-most important reserve currency’s role in global markets.
1. Deep and liquid Eurobonds required
The deep and liquid US Treasury market is one important supporting factor for the US dollar’s dominant role as a reserve currency. With one of the last AAA ratings, German bunds have built a strong reputation as a safe-haven asset, but the outstanding value at €2.5tn is less than 10% of the US Treasury market, currently valued at around $30tn. Hence the creation of a deep and liquid market is unlikely to be accomplished by an increase in German bund issuance alone. Instead, truly European safe assets would be preferable, arguing for the joint issuance of Eurobonds. While these remain a subject of intense political debate, the establishment of the NextGenerationEU recovery fund in 2020 represented a major breakthrough, marking the first time the EU collectively issued largescale debt backed by the EU budget.
There has been a glut of proposals of how to address the moral hazard problem arising from common euro area debt, with Blanchard and Ubide (2025) offering the most recent idea. Instead of issuing new Eurobonds, they propose to replace a substantial portion of the existing stock of national bonds with Eurobonds. Exchanging national bonds for Eurobonds up to a 25%-of-GDP threshold would create a €5trn market – a size that would offer enough liquidity for investors, while being perceived as safe. Once demand from global investors is on the rise, this will likely push Eurobond yields to levels that are lower than national bond yields. Yet, acknowledging that Eurobonds remain politically controversial and continue to face political opposition from Germany and the Nordics, further progress towards a fiscal union and/or improved control measures will be necessary to ensure fiscal discipline.
2. Introducing an ECB digital currency
Speeding up the development of the digital euro, initiated in 2021, represents another way to increase demand for the euro. In light of the Trump Administration’s recent moves (Executive Order 14178, GENIUS Act) to establish the legal grounds and foster the use of dollar-backed stablecoins, progress on this front will be particularly important, in our view. Similarly stablecoins, the digital euro will enhance payment efficiency by enabling real time or near-instant settlements, which enhance cross-border payments. The introduction of the digital euro would also improve financial inclusion by providing payment options to people without bank accounts, especially in remote or underserved areas. Most importantly, the ECB-backed digital euro would be free of default risk, representing a competitive advantage over privately issued dollar-backed stablecoins. Lastly, the digital euro would enhance monetary and strategic autonomy and reduce the reliance on non-European payment systems such as US credit card companies or Big Tech wallets, while improving transaction transparency and supporting anti-money laundering efforts.
3. Trump’s policies offer a rare chance in global trade
President Trump’s trade wars are weakening trade links between the US and its traditional allies and partners. But at the same time, this presents a unique chance for the euro area to increase its role and share in global trade. While oil exporters of the Middle East are expected to continue to hold a preference for dollar payments, euro adoption could be popular for trade in sectors where the euro area holds a competitive advantage, such as machinery, pharmaceuticals, or green technologies. As more countries deepen economic ties with the euro area, they will begin to invoice trade in euro to the detriment of the US dollar. Notably, the euro’s share of global export invoicing is already higher than 40%, reflecting the euro area’s trade openness. Increased trade often leads to higher levels of foreign direct investment, raising financial flows into the euro area and reinforcing the euro’s status as a store of value and unit of account in international finance. While this would incentivise non-European central banks to hold more euro-denominated reserve assets, the euro’s potential in global trade is closely intertwined with the euro area’s long-term potential growth. Consequently, more efforts will need to be undertaken to increase the competitiveness of the euro area economy.
Euro’s transition would bring major benefits
The euro’s transition into a more broadly used global reserve currency would come with clear benefits for the euro area and its members. Like US Treasuries, European assets could benefit from a convenience yield – a premium that investors are willing to pay for holding a highly liquid and safe asset. The increased use as a reserve currency would render the euro more stable during cyclical downturns and increase European governments’ fiscal space to stabilise economic activity in these periods.
And there would even be a self-fulfilling element to it: if market participants rushed into euro-denominated assets in times of stress, there would be an incentive to do the same for others, as bond holders benefit from higher bond prices and a stronger euro. A broader use of the euro as a global reserve currency or for international payments should – on balance – lead to further euro appreciation. Put into a longer-term context, the euro’s strong YTD performance is by no means outsized, when considering the magnitude of recent geopolitical shifts. Given that the euro’s nominal and real trade-weighted exchange rates have only risen moderately above their long-term averages and valuations appear far from stretched, there is more room for the euro to appreciate in the longer term, likely bringing EUR-USD closer towards 1.30.
By Claudio Wewel, FX strategist at J. Safra Sarasin Sustainable Asset Management
