Limited global demand caps ambitions – Commerzbank

Commerzbank’s Thu Lan Nguyen explains that the ECB’s expansion of its EUREP facility to all eligible non‑Euro central banks is aimed at boosting Euro liquidity globally and supporting the Euro’s international role. However, she stresses that demand for Euro liquidity remains minimal compared with the Dollar, limiting prospects for the Euro to challenge the Dollar’s dominance in trade and reserves.

ECB widens EUREP but demand lagging

“The ECB announced over the weekend that it will grant all non-euro central banks access to its euro liquidity facilities in the future (provided there are no regulatory grounds for exclusion). This means that the Eurosystem’s repo facility – EUREP for short – which was previously mainly accessible to central banks in neighboring regions, will be opened up. The aim is to provide sufficient euro liquidity far beyond the euro area, especially when it is particularly needed in turbulent times on the financial markets.”

“This step must be seen in the context of the recent intensified efforts by EU leaders to strengthen the euro as an international currency. And the signal is clear: everyone should be able to obtain euros when they are needed. But here’s the crux of the matter: so far, there has been little demand.”

“This becomes particularly clear when comparing the use of the ECB’s euro liquidity lines to date with those of the US Federal Reserve. One period in which the Fed’s liquidity lines were most needed was in 2020 during the coronavirus pandemic, when fears of lockdowns were rampant. At their peak, outstanding payments from the Fed’s USD lines to foreign central banks reached around USD 450 billion.”

“Of course, the Fed’s network is much more extensive. The US Federal Reserve maintains permanent swap lines with the five most important central banks in the world (ECB, Bank of Japan, Bank of England, Swiss National Bank, Bank of Canada). But the point is rather that in times of stress on the global financial market, everyone demands US dollars and not euros.”

“The idea of the European monetary authorities is clear: they want to make the euro attractive enough so that more and more companies use the common currency for cross-border payments. However, in order to knock the dollar off its throne, the euro would have to increasingly function as a vehicle currency, i.e., be used in transactions between third countries.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)