Is the Euro becoming a global currency?

Investing.com -- Recent commentary has fueled speculation about the Euro’s potential to become a global currency anchor, driven by growing optimism for the Euro and increasing negativity towards the U.S. Dollar. 

However, Macquarie analysts said in a recent note that while the Euro is "the next best thing," the U.S. Dollar remains "irreplaceable."

Macquarie outlines several preconditions for a global currency. The Euro, alongside the USD and Yen, satisfies the requirement of being convertible with no capital controls. 

However, it is said to fall short on other crucial aspects. A global currency issuer should ideally run a current account deficit to supply sufficient funds to foreign hands, a condition met by the USD but not the Euro, Yen, or CNY, according to Macquarie. 

Furthermore, they state that a global currency needs a "deep and liquid pool of assets," where the USD qualifies, but "EMU has never built a fully integrated capital market."

Regarding settlement systems, Macquarie states that "SWIFT and CHIPS are the bedrock of USD hegemony, with no one else coming even close." 

While the U.S. is "increasingly failing" in having sturdy domestic institutional pillars and consistent rule-based policies, the EU is deemed a "much more ’rules-based order.’" 

However, the U.S. is said to stand out in terms of "stronger than average growth and liquidity indicators," being the "only major economy able to add labor and capital while growing multi-factor productivity."

Despite the Euro’s shortcomings in fully meeting all preconditions, Macquarie acknowledges its growing importance. 

While "USD still accounts for 58% of FX reserves," the "euro is second at 20%." Similarly, they note that the "USD has ~50% of SWIFT transactions, with euro second at 22%," and the "USD prices ~55% of trade, euro is next at 30%."

Macquarie concludes that "there is no USD replacement in sight, but even a 5%-10% relocation could have a meaningful valuation impact across asset classes."