International use of the Euro slipped last year because of the debt crisis in Europe, but the US dollar held its own as the world’s leading currency for reserves held by central banks, according to the European Central Bank.
Currencies not traditionally used as reserves, such as the Canadian and Australian dollars, gained in favour as those countries enjoyed steady growth and lower debt than major economies.
The European Central bank said Tuesday that the Euro share among the currency reserves held globally by central banks fell to 23.9% in 2012 from 25.1% the previous year. The dollar’s share was little changed at 61.9%.
The ECB said the financial crisis that has afflicted the 17-country Euro-zone was a factor discouraging use of the Euro for reserves, which are often held in the form of government bonds. Lending across borders in the Euro zone has dropped, diminishing the liquidity that reserve holders like to see. Lower liquidity means there are fewer buyers and sellers readily found.
The Euro zone countries have struggled with heavy levels of public debt — Greece, Portugal, Ireland and Cyprus have needed financial rescue and even large economies like Spain and Italy have worryingly high debt. Concern over that debt eased only after the European Central Bank came up with a plan to buy the government bonds issued by countries that promise to reform.
In its annual report on international use of the Euro, the ECB also found that there was less borrowing in Euros internationally by companies because they could get lower interest rates by selling bonds denominated in US dollars.
Countries hold reserves of foreign currency so they can influence their own currencies’ exchange rates in case they rise or fall too rapidly. They can do this by buying or selling currencies on foreign exchange markets.
The country issuing the reserve currency can benefit because demand from abroad supports its exchange rate and can mean lower borrowing costs for the government, as has been the case with the US dollar in its role as the leading reserve currency.
Demand for dollars in the form of US Treasury bonds by other countries — such as China — helps keep down the interest rate that the US government pays to borrow. Money that is not spent on interest can be spent on other things, or saved.
A key finding of the report was that non-traditional reserve currencies such as the Canadian dollar and the Australian dollar have been in greater demand because of their growing economies and better public finances. There have been concerns about government debt not only in Europe but also in the countries that issue the world’s other traditional reserves: the US, Japan and Britain.
The category of ‘other’ currencies saw its share of officially disclosed reserves increase from 5.7% to 6.1%, ahead of both the Yen at 3.9% and the pound sterling at 4.0%. The ECB said that category’s share is the highest since the early 1970s, when the earlier international currency system set up at the Bretton Woods conference in 1944 collapsed.
The ECB said, however, that the use of such non-traditional currencies might slow if major economies start reducing debt and deficits. Such currencies are also of limited use, the ECB said, because they are less liquid.