The euro has seen significant gains against the dollar amid uncertainty around President Trump’s tariffs policies.
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U.S. President Donald Trump’s tariffs regime has sparked volatility in American assets — and European officials are making no secret of wanting the euro to seize upon wavering confidence in the U.S. dollar.
The dollar is the world’s most commonly held reserve currency, accounting for almost 60% of global foreign exchange reserves and playing an important role in the trade of assets like oil and gold. It also acts as a peg for currencies including the Hong Kong dollar and the Saudi Riyal.
In second place, trailing far behind the greenback, is the euro, which makes up around 20% of international FX reserves.
The dollar index — which measures the greenback against a basket of major rivals — has fallen by more than 8% since the beginning of the year. This week, European Central Bank President Christine Lagarde said the shifting geopolitical landscape that was driving those moves gave European policymakers an opportunity to raise the euro’s status.
“Multilateral cooperation is being replaced by zero-sum thinking and bilateral power plays,” she said on Monday in a speech at Hertie School in Berlin. “There is even uncertainty about the cornerstone of the system: the dominant role of the US dollar.”
This, she said, could “open the door for the euro to play a greater international role.”
Closing that gap was “far from guaranteed,” Lagarde noted in her speech, while nevertheless suggesting that the European currency could “earn” greater global influence with the right policy mix.
“First, Europe must ensure it has a solid and credible geopolitical foundation by maintaining a steadfast commitment to open trade and underpinning it with security capabilities,” she said.
“Second, we must reinforce our economic foundation to make Europe a top destination for global capital, enabled by deeper and more liquid capital markets. Third, we must bolster our legal foundation by defending the rule of law — and by uniting politically so that we can resist external pressures.”
A euro with a raised reserve currency status would bring a plethora of benefits to Europe, Lagarde added, including lower borrowing costs for regional governments, insulation from exchange rate volatility and protections for Europe from sanctions “or other coercive measures.”
“In short, it would allow Europe to better control its own destiny,” Lagarde added.
She isn’t the only ECB official touting the possibilities for the euro, as confidence in the U.S. wavers. Last week, Isabel Schnabel, a member of the central bank’s Executive Board, said the euro area could become a safe haven as Trump’s tariffs policies take hold — giving the region “a historical opportunity to foster the international role of the euro.”
Market watchers who spoke to CNBC were divided on the euro’s potential to seize some of the dollar’s share of global FX holdings.
Appearing on CNBC’s “Europe Early Edition” on Friday, George Buckley, chief European economist at Nomura, said he could see upside ahead for the euro, as investors looked to diversify away from the greenback.
Asked whether he agreed with Lagarde’s assessment of the currency’s potential, Buckley responded: “Certainly to some extent.”
“The dollar still is the biggest reserve currency in the world … the euro is still a distant second, but it’s gaining in momentum quite significantly with all the things going on in the U.S.,” he said. “I think, for sure there is going to be a lot more interest.”
Buckley said he was seeing suggestions that, in the current environment, investors might want to allocate their funds to assets other than the dollar.
“If they’re thinking of switching out of the dollar, the euro is an obvious choice,” he told CNBC. “It’s a huge trading bloc, and clearly the euro is benefiting from this. We think that the euro could be rising to around about $1.20 by the end of the year.”
The euro was trading at around $1.13 on Friday morning. Since the beginning of the year, the currency has gained more than 9% against the U.S. dollar — a move to $1.20 would mark an additional jump of around 6% from current prices.
While Buckley was optimistic about the outlook for the euro, Aaron Hill, chief market analyst at FP Markets, told CNBC that the dollar’s dominance “remains formidable.”
“The euro, while backed by the European Union’s substantial economic weight, faces significant hurdles,” he said. “Political fragmentation across member states and reliance on U.S. security frameworks limit its global influence.”
Hill added that the euro’s limitations were unlikely to evaporate any time soon.
“While rising U.S. debt and shifting global alliances warrant scrutiny, the euro lacks the cohesion and reach to challenge the dollar’s supremacy in the near term,” he told CNBC. “For now, the greenback’s reign endures, unshaken.”
On Tuesday, John Plassard, senior investment specialist at Mirabaud Group, had told CNBC’s “Europe Early Edition” that, with the U.S. dollar still accounting for almost 60% of global foreign exchange reserves, there was “no competition for the U.S. dollar” right now.