Two decades since its launch, the euro’s role in the international financial system is in transition. As usage of the single currency grows for borrowing, inter-bank funding and cross-border carry trades, the eurozone is emerging as the new global provider of liquidity to the international financial system and displacing the dollar, says Deutsche Bank’s Corporate Bank Focus Research team
Unnoticed by many, the euro is increasingly first choice for global borrowing, inter-bank funding and cross-border carry trades, reports Graham Buck. While no-one now wants to hold euro cash as an asset, everyone wants it as a liability. In response, the eurozone is emerging as the new global provider of liquidity to the international financial system, and steadily displacing the dollar.
Analysis of the euro still focuses on its role as an asset, reserve or investment vehicle, but 21 years since its launch far bigger shifts are taking place in the single currency’s status as a global liability currency. Its role in the international financial system is being fundamentally transformed, suggests a report from Deutsche Research, head of FX research, George Saravelos.
He notes the European Central Bank’s adoption of unconventional policies in recent years. The first phase was marked by large European portfolio outflows; this is now followed by a new phase of outflows based on rising euro funding. For the FX market this latest trend has kept the euro subdued and volatility benign during periods of positive risk appetite. However, any future period of risk aversion could see sharp bouts of volatility and euro appreciation. “Europe is becoming the world’s new carry trade,” comments Saravelos.