Euro healing, but still distant No. 2 to US dollar

AP Business WriterJuly 16, 2014 

Europe Economy

FILE - In this Thursday, Jan. 5, 2012 file photo, a person is reflected in a puddle alongside the Euro sculpture in front of the European Central Bank in Frankfurt, Germany. International investors are recovering their appetite for euros as the shared currency recovers from a debt crisis that threatened to break it up.

MICHAEL PROBST, FILE — AP Photo

— International investors are regaining their appetite for euros as the shared currency recovers from a debt crisis that threatened to break it up.

But the euro, which is shared by 18 countries, fell further behind the U.S. dollar last year in another key measure of importance and prestige: its use as a reserve currency by the world's central banks.

The European Central Bank said Wednesday that foreign demand for stocks, bonds and other portfolio investments in euros rose to 3.7 percent of eurozone economic output in 2013. That was up from 3.0 percent the year before.

Benoit Coeure, a member of the bank's six-member executive board, said investors were responding to the easing of the crisis and showing "full confidence that the euro will stay."

Yet other indicators on the euro's global use remained mixed. In particular, the currency's share of global central bank reserves slipped to 24.4 percent from 25.3 percent. The U.S. dollar remains on top, with 61.2 percent. Central banks build up reserves to cushion their economies against possible turbulence and can use them to prop up their own currency's exchange rate if it comes under pressure.

Presenting the bank's annual report on international use of its currency, Coeure said one reason for that is that conservative central bank officials may move more slowly than private investors to adjust their holdings. Another factor could be a long-term diversification in which banks add more currencies from emerging economies such as China, reflecting their increasing weight in the global economy. He stressed that the ECB did not encourage or discourage the euro's use for international trade or reserves, leaving that to markets.

"We don't have a policy view here," he said.

Still, the international use of a currency can bestow concrete advantages. The dollar's role as the No. 1 reserve currency creates continuing demand for dollar-denominated securities such as U.S. Treasurys. One result is very low borrowing costs for the U.S. government. The dollar's role as a reserve currency also supports the dollar's exchange rate, helping the U.S. to run large trade and budget deficits without seeing its currency fall sharply in value.

Other indicators were mixed. The euro's share of international bond market borrowing and foreign exchange trading fell slightly, while its use in paying for exports and imports to and from non-eurozone countries rose slightly.

The stronger demand for portfolio investment in euros shows recovering confidence but in the short run it can be a headache, since it increases the euro's exchange rate. A stronger euro can hurt exporters and plays a role in inflation being lower than the ECB would like by making imports cheaper.

Fears over a breakup of the euro eased after ECB head Mario Draghi said in July 2012 that the bank would do "whatever it takes" to save the euro and then offered to buy unlimited amounts of government bonds if needed.

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