FRANKFURT (Reuters) -The euro cannot replace the dollar as the world’s dominant currency, but needs to strengthen its global role, partly to protect the bloc in case of a sustained loss of confidence in the dollar, Germany’s central bank chief said.
The dollar has fallen this year in response to erratic U.S. policies, boosting calls across Europe to beef up the euro’s global role to provide investors with an alternative safe haven.
Analysts and central bankers have voiced concern that tariffs make trade policy unpredictable, that large tax cuts, promised by U.S. President Donald Trump, make U.S. debt unsustainable and his attacks on the U.S. Federal Reserve’s independence have damaged the dollar’s safe haven reputation.
“The U.S. dollar is no longer fully perceived as a safe haven,” Bundesbank President Joachim Nagel said.
“While it seems neither realistic nor desirable for the euro to replace the U.S. dollar as the reserve currency in the foreseeable future, a greater international significance of the euro would certainly be possible and desirable,” Nagel added.
For the euro to gain international weight, the bloc needs a stability-oriented fiscal stance, predictable policies, military assertiveness, deep, liquid, and open capital markets, and a wide range of high-quality, safe investments, Nagel said.
“The high savings of European households should be better channelled to increase innovation, productivity, and competitiveness,” Nagel said. “Our savings are urgently needed to finance Europe’s green and digital transition, as well as defence spending.”
Although reduced confidence in the dollar has increased the euro’s value, Nagel said he was not concerned about its current valuation, especially since the gain was much smaller when based on trade-weighted numbers.
The euro also needs to be able to ward off the stability threat from the growing role of stablecoins in the financial world, Nagel said.
Stablecoins are designed to maintain their value, but without regulation, pose a risk to financial stability since a loss of confidence in them could lead to a fire sale of reserve assets, especially U.S. government bonds.
(Reporting by Balazs Koranyi; editing by Barbara Lewis)
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