The euro is the world’s second most important currency, ranking behind the U.S. dollar. However, the gap between the dollar and the euro in worldwide use is large. Certain recent U.S. policies, including tariffs, huge tax cuts, and political interference with the Federal Reserve, have reduced the dollar’s reputation as a “safe haven” currency. This has contributed to a weaker dollar and a stronger euro.

These conditions provide the euro with an opportunity to bolster its global position and provide investors with a real alternative. Greater global standing would provide the euro area with increased “financial independence.” It would also serve as an insurance against lost confidence in the dollar and could create funding cost advantages for member states and euro area firms. The share of the euro in foreign exchange reserves abroad has remained stable at around 20%, while the share of the dollar has fallen, and it is used to invoice over 40% of international trade.

Conditions for a Stronger Euro

For this goal to be met, the euro area needs to meet several conditions albeit being politically challenging:

• Fiscal Sustainability: Maintain a “stability-oriented fiscal stance” on solid policies. Solid fiscal policy would produce more high-grade, secure government bonds in the euro area to underpin the global role of the currency. That is because, in contrast to the single, very deep U.S. Treasury market, the bond market in the euro area is dispersed across member countries with different credit and political situations.
• Market Integration: Create deep, liquid, and open capital markets in the bloc. Lack of a true Capital Markets Union (CMU) is a powerful inhibitor, withholding European savings from being properly channeled into productive investment and limiting supply of “safe” euro-denominated assets.
• Investment: Invest the savings of European households more efficiently in innovation, competitiveness, and productivity. This will be required to finance Europe’s green and digital transitions, as well as defense expenditures.
• Stablecoin Risks: The head of the Bundesbank also perceived a fresh threat to financial stability: growing usage of stablecoins. He reported that without regulation, loss of confidence in stablecoins could lead to a “fire sale” of reserve assets, particularly U.S. government bonds, and destabilize the financial system.

The euro is poised to be a giant beneficiary of the dollar fall. As countries and investors seek alternatives, the euro has a strong probability of increasing its global role, says Bundesbank President Jens Weidmann. The euro is a large, stable currency with profound, liquid markets, a natural among diversifiers.

Today’s de-dollarization push is a lasting threat to the dollar’s dominance. A fall in dollar demand for global trade and finance would lead to its depreciation and loss of reserve currency status. This movement is partly driven by U.S. policies that fuel questions about the fiscal sustainability of the United States and the independence of the Federal Reserve. For instance, deep tax reductions have raised public debt in the United States sharply, which undermines the dollar in the long term.

Emerging Giant: The Chinese Yuan

The Chinese renminbi, or yuan, is also on the rise, primarily in China-trade, but it has a long way to go before it challenges the euro or the dollar internationally. The trend is toward a more multipolar currency system with multiple major currencies displacing the dollar, not one.

The yuan has performed better in trade finance, where it has maintained steady growth. Usage of cross-border trade settlement has been increasing very robustly, with more than 20% yearly growth in the last year alone, and yearly payment volume through China’s CIPS network rose 43% in 2024. Issuance of “panda bonds” (yuan-denominated bonds issued by offshore borrowers in China) has also grown robustly, demonstrating increasing confidence in yuan-denominated assets.

The Future in Sight: A Multipolar System

The most likely future is a multipolar currency system where the dollar, the euro, and the yuan all have significant but distinct roles to play. The euro has proven itself to be a hardy and stable alternative to the dollar, and the yuan increases continuously as increasingly important regional and trade currency.