(7 December 2018 – Europe) The European Commission (EC) published non-binding proposals this week to boost the role of the Euro in international payments and as a reserve currency to challenge the dominance of the US Dollar.
The Greenback has experienced a significant appreciation against a basket of global currencies in 2018 yet is set to be undermined in 2019 on increasing concerns about slowing domestic US economic growth according to a Reuters poll of FX analysts.
The EU executive Commission called on companies and states to increase their use of the euro in energy contracts and said it would study possible measures to promote the Euro in financial and commodity markets. Both the Euro and Chinese Renminbi have been touted as potential replacements of the US Dollar as preferred reserve currencies yet this has been yet to eventuate to due to several extenuating circumstances such as commodity markets structured against USD quotations. “The decision to use a currency is ultimately made by market participants,” the EC acknowledged stressing the most effective way to widening the international role of the euro was to overhaul the 19 country currency union and adopt banking and financial reforms which have been blocked for years by conflicting national interests.
The greenback may struggle to move much higher given currency market participants bets in favour of the dollar are the highest since December 2016, according to Commodity Futures Trading Commission data. This week the focus will be firmly on inflation with CPI data due on Wednesday. The figure is expected to have been flat in November as a result of the oil price slide with annual headline inflation sliding to 2.2 percent from 2.5 percent, potentially dragging the USD with it. The US dollar have also be negatively impacted by expectations the US Federal Reserve may be closer to the end of its three year rate hike cycle, something economists said was a risk in a separate Reuters poll.
“We have lifted our USD forecasts on the back of a stronger than expected performance by the U.S. economy and specific factors weighing on other currencies. For instance, the euro has been punished harshly as a result of the deterioration in the political context. The fact that we had to raise our dollar projections does not change our scepticism about the long-term strength of the dollar, especially against G5 currencies. Nevertheless, these economies’ domestic contexts will be crucial for the performance of the greenback” said BBVA FX strategist Roberto Cobo Garcia.