Why the Euro Could Grow as a Dollar Replacement
- Written by: Sam Coventry
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As global confidence in the U.S. dollar continues to waver — driven by rising political risk, trade tensions, and fiscal uncertainty — momentum behind de-dollarisation is gaining pace.
The euro is emerging as a key beneficiary, attracting increased interest from central banks, investors, and sovereign wealth funds.
However, researchers at ING say structural challenges within the eurozone mean that a full transition to EUR dominance, or a sustained EUR/USD move above 1.30, remains constrained by economic fundamentals, asset market depth, and political fragmentation.
The following is a summary of research titled "De-dollarisation and the euro" by ING.
Why the Euro Could Grow as a Dollar Replacement
De-dollarisation trend: Central banks are gradually reducing their USD exposure. In 2024, the euro was the primary beneficiary, gaining EUR 128bn in FX reserve allocations.
Dollar disillusionment: Political and fiscal instability in the U.S., especially under Trump's tariff and monetary policies, has undermined confidence in US Treasuries as “safe assets.”
Europe's potential as safe asset provider: Eurozone government bond market is growing (~€11tn).
Joint EU bonds (e.g., for defence spending) could create a credible alternative to US Treasuries.
Private sector shifts: Increased “Reverse Yankee” issuance (U.S. corporates issuing in euros) due to lower funding costs. Euro credit markets are receiving stronger fund inflows than USD.
Role in global trade and finance:
Euro’s share in international debt securities is 38%, second only to the USD.
The global trade system has shifted to a tripolar structure (EU, US, China).
Greater invoicing in euros, especially in EU-linked trade and green energy, could drive reserve demand.
Sovereign wealth funds: With $13.7trn in AUM, their gradual diversification into euros may follow central banks.
ING says a EUR/USD at approximately 1.25 is consistent with increased uptake of EUR assets as reserve.
Constraints on EUR/USD Reaching 1.30+
Economic fundamentals not aligned:
The current fair value (BEER model) of EUR/USD is estimated around 1.11.
A move to 1.30 would imply a radical improvement in eurozone fundamentals vs. the U.S., particularly in:
Terms of trade (eurozone benefits from lower energy prices, but gains may be short-term).
Productivity (currently lags behind the U.S.).
Current account dynamics (U.S. deficits would need to widen or Europe’s surpluses to increase).
Insufficient high-quality euro assets:
The eurozone lacks a unified, deep market like U.S. Treasuries.
Only a few AAA-rated euro sovereigns exist, limiting safe asset supply.
Joint EU issuance remains politically fragile and non-systematic.
Liquidity infrastructure gaps:
EU bonds are not yet included in key bond indices due to absence of a liquid futures market, although steps are underway (Eurex futures in development).
Energy pricing remains in USD:
Europe’s reliance on USD for LNG and hydrocarbons still enforces demand for USD reserves.
Political fragmentation:
Lack of fiscal union and reluctance to mutualize debt limits market confidence in eurozone-wide assets.
