The Share of Euro in Foreign Exchange Reserves Decreased in 2023

The Share of Euro in Foreign Exchange Reserves decreased in 2023 in favor of dollars and yen, as well as ‘non-standard currencies’ such as the Chinese renminbi, the European Central Bank reported on Wednesday, warning that its future could be ‘significantly’ determined by Western sanctions on Russia.

The share of the euro in foreign exchange reserves fell by a full percentage point last year to 20 percent, according to the ECB. The share of the dollar remained almost unchanged at 58.4 percent. Both the Japanese yen and the Chinese renminbi remained, more or less, at the 2022 level, with shares of 5.7 and 2.3 percent, respectively.

When excluding the euro and the dollar, the share of other currencies in foreign exchange reserves slightly increased and slightly exceeded 20 percent, signaling an increasingly important role of ‘non-standard’ currencies in global portfolios, the bank concluded, explaining that this category, along with the Chinese renminbi, includes the Australian, Canadian, and Singaporean dollars, as well as the South Korean won and the Swedish and Norwegian crowns.

Central banks net sold euro-denominated assets last year worth 100 billion euros, determined the eurozone central bank. Thus, the reserves of the Swiss central bank were reduced by 35 billion euros last year, primarily due to market intervention to support the domestic currency.

The increase in interest rates in the eurozone did not help the euro because the economic outlook for the eurozone is subdued and interest rates in many other countries are even higher, notes the ECB, referring to an HSBC survey on trends in foreign exchange reserve management that covered 91 central banks.

– Respondents in the survey cited weak growth prospects in the eurozone, a poor supply of high-rated assets, and centralized bond issuance as possible factors hindering investments in euro-denominated assets, states the ECB.

Uncertainty is also created by frozen Russian assets. Due to the Russian invasion of Ukraine, Western countries froze Russian state assets worth about 300 billion dollars in 2022. Before the freezing, Russia held about eight percent of global foreign exchange reserves in euros.

From 2015 to 2021, the share of the euro in Russian foreign exchange reserves was about 40 percent, as in Switzerland, and was approximately double the global average, notes the ECB. The ‘appetite’ of other countries for euros weakened during that period.

– This leads to the conclusion that sanctions-related measures could be relevant for the share of the euro in global foreign exchange reserves in the future, warn the ECB.

The central monetary institution of the eurozone has repeatedly expressed concern about the G7’s plans to seize frozen Russian assets and direct the proceeds to the reconstruction of Ukraine, warning that such a move could deter investors from assets denominated in the common European currency.

– Turning a currency into a potential weapon inevitably diminishes its attractiveness and encourages the emergence of alternatives, emphasized this year the governor of the Italian central bank and former ECB board member Fabio Panetta.