The Euro’s Ascent Won’t Knock the Dollar Off Its Perch

(Bloomberg Opinion) -- With the euro surging to its highest level for six years, based on the European Central Bank’s trade-weighted index, the doom-mongers predicting the dollar’s demise as the world’s reserve currency of choice have started chorusing once more. As usual, they will be proved wrong.

Traders who’ve been speculating that the common currency would benefit from the euro zone’s superior pandemic response, at least when compared with the U.S., have been rewarded for their faith. The euro is up by 4.3% against the dollar this year, and is at its strongest since 2014 versus a basket of the currencies of the bloc’s 19 biggest trading partners.

Moreover, those bets continue to accumulate. Figures compiled by the Commodity Futures Trading Commission show net positions designed to profit from euro strength have risen steadily since flipping positive in March, and are at their most bullish since April 2018.

On a two-way trade in the midst of a pandemic, the data on both infection rates and deaths from the coronavirus suggest it makes sense to back the euro versus the dollar, given the U.S. administration’s woeful performance in curbing its spread. Add in the U.S.’s worsening relationship with China and the prospect of political turmoil around the November presidential election, and it’s easy to see why the greenback is down to its weakest position against 10 major peers since September 2018.

But weighing the likely speeds at which countries will emerge from lockdown and assaying the latest tit-for-tat embassy closures tells us nothing about the long-term likelihood of the dollar losing its status as the world’s preferred currency. Global central banks have about $11 trillion of reserves, according to the International Monetary Fund. More than 60% is in dollars, amounting to $6.8 trillion, compared with about 20% in euros, 6% in yen and less than 5% in pounds. Moreover, a survey of more than 50 central banks published last week by Invesco Ltd. showed increasing dollar appetite in the coming year.

In the survey, Invesco explicitly asked whether central banks expected the dollar’s position, as the principal store of value for the world’s foreign exchange reserves, to weaken in the next five years. The result was overwhelmingly in favor of the status quo.

The euro may well continue to gain while the pandemic persists, though mostly as a result of dollar weakness. But as Invesco said in its report, “it would appear that discussion of the U.S. dollar’s demise as the world reserve currency has been greatly exaggerated.” For now, at least, the dollar’s reign will continue.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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