Euro and Yuan Seize Opportunity as Dollar Falters [Economic Policy Zoom-In]

Lagarde: "Euro Strengthens Against Dollar
Trump's Policies to Blame... An Opportunity for Europe"
Expert: "If Foreign Convertibility and Accessibility Are Liberalized,
Yuan Could Rival the US as a Global Currency"

The dominance of the US dollar is weakening, and President Donald Trump is accelerating this trend. However, the dollar's status as the world's key reserve currency is expected to remain solid, primarily because there are no viable alternatives.

Yonhap News

The euro, which serves as the second most important reserve currency after the dollar, faces its own limitations. The eurozone is not a unified country, and its bond markets are fragmented, with separate markets for French, German, and Italian bonds. The eurozone also does not produce a sufficient supply of safe assets.

The Swiss franc is considered a safe currency, but Switzerland's economy is relatively small. Japan has a large economy, but its government debt-to-GDP ratio was 252.4% as of 2023, indicating a high level of debt. China has risen to become the world's second-largest economy, but it is reluctant to open its capital markets. The internationalization of the yuan is also progressing slowly.

Gold and virtual assets are not backed by the credit of any nation.

Nevertheless, the euro and the yuan both have ambitions to become reserve currencies. The weakening of the dollar's dominance is being seized upon by the eurozone, which has long been dissatisfied with the US's overwhelming dollar hegemony, and by China, which is steadily promoting the internationalization of the yuan.

Christine Lagarde, President of the European Central Bank (ECB), said in a speech in Berlin, Germany, on the 26th, "The changes currently taking place are opening a 'global euro era.' This is a golden opportunity for Europe to take stronger control of its own destiny," adding, "However, these benefits will not be handed to us automatically. We must seize them ourselves."

She pointed out that the openness and multilateral cooperation of the global economy are being replaced by protectionism and power competition, saying, "Uncertainty is also being raised about the dominant role of the dollar that supports this system. This is an opportunity for Europe to lead its own destiny more strongly."

President Lagarde also stated in an interview with the French media outlet La Tribune Dimanche on the 18th that the recent strengthening of the euro against the dollar is attributable to President Donald Trump's unpredictable economic policies, and she assessed that this could be an opportunity for Europe.

She remarked, "It is remarkable that, in a period of uncertainty when the dollar would normally appreciate significantly, the euro is instead appreciating against the dollar. This can be explained by uncertainty and a loss of confidence in US policies in certain segments of the financial markets."

She emphasized, "This is not a threat but an opportunity," and stressed the need to accelerate the process of deepening the European Union (EU). She also said, "In a situation where questions are being raised in the United States about the rule of law, the judicial system, and trade rules, and where new uncertainties are emerging daily, it is natural for Europe to be seen as a stable economic and political region with a sound currency and an independent central bank." Previously, Luis de Guindos, Vice President of the ECB, also stated that the euro could become an alternative to the dollar as a reserve currency within a few years.

Regarding the yuan, Hoe Ee Khor, Chief Economist at the ASEAN+3 Macroeconomic Research Office (AMRO), commented in an interview with Hong Kong media outlet SCMP. He predicted that if China liberalizes the convertibility and accessibility of the yuan for foreigners, it could potentially rival the US dollar as a global currency.

Economist Khor stated, "American exceptionalism?the idea that the US is a uniquely special nation?is over. This is the beginning of the end," adding, "The US dollar is no longer as safe a currency as it once was. The yuan has always been considered one of the possible alternatives and continues to grow."

He noted that China wants to expand the international use of the centrally controlled yuan, and that the yuan already functions smoothly in cross-border purchase settlements. However, he emphasized that for the yuan to become a true alternative to the dollar, China must deepen its financial markets so that foreigners can more easily access yuan-denominated stocks, bonds, and other assets.