The switch to a long euro market position after a long period of a short euro position shows that financial markets are beginning to believe in this prospect of both a rise in the euro’s share of global foreign exchange reserves and an appreciation of the euro, according to analysts at Natixis.
“There is a clear parallelism between the euro’s share of global foreign exchange reserves and the euro’s exchange rate against the dollar: the euro’s share fell and the euro depreciated from 1999 to 2001; the euro’s share then rose sharply and the euro appreciated from 2002 to 2008; then the euro’s share fell again, especially from 2013, and the euro depreciated. If the euro’s share of global foreign exchange reserves rose again today, the euro would therefore appreciate anew.”
“The increase in the euro’s share of global foreign exchange reserves would stem from the increase in the US’ external debt, which may worry international investors; the fact that China, Russia and Japan are no longer buying dollar-denominated bonds; recognition of the progress being made in Europe: development of new technologies and corporate modernisation, newfound solidarity between the countries with the European recovery plan, an employment rate that has become higher than that of the US; the emergence of a European Union debt, which will attract European savings at the expense of US Treasury debt. The eurozone currently uses a significant share of its savings surplus to buy Treasuries and the elimination of the risk of a crisis in the peripheral euro-zone countries thanks to the ECB’s interventions.”