Market News

BY Tim Wallace

Despite the tough talk about slapping 50pc tariffs on the EU, Donald Trump has given Brussels a golden opportunity.

After years of disappointment, false hope and crises, the euro could at last wrest international dominance away from the dollar to become a – and possibly the – global reserve currency of choice.

Or so Christine Lagarde hopes. The president of the European Central Bank (ECB) set out her master plan last week to at long last fulfil the dream of leading the financial world.

“Moments of change can also be moments of opportunity. The ongoing changes create the opening for a ‘global euro moment’,” she said in a speech in Berlin, in which she retold the story of the pound losing its dominance a century ago amid the rise of the US dollar.

“This is a prime opportunity for Europe to take greater control of its own destiny.”

The opportunity to which she refers is the rise of Trump and the shattering of the old order. The dollar has been the default currency for global trade for decades, with contracts, assets and deals all priced and conducted in the greenback.

But the US president’s decision to slap tariffs on allies and foes alike has shaken faith in this way of working.

“Multilateral cooperation is being replaced by zero-sum thinking and bilateral power plays. Openness is giving way to protectionism,” Lagarde said. “There is even uncertainty about the cornerstone of the system: the dominant role of the US dollar.”

Controlling Europe’s destiny

Dean Turner, economist at UBS, says the dollar’s share of foreign currency reserves has been falling for years, and recent events should push more funds into euros “at the margins”. This is already happening: the single currency has risen by 9pc against the dollar since Trump took office.

The dollar slid again on Monday as China accused the US of violating the deal struck between the world’s two largest economies in Switzerland last month.

The latest spat highlighted international fears over America’s position and sent the greenback down 0.7pc against the euro. It left the single currency trading at more than $1.14, close to its highest level for more than three years.

“Given the high degree of policy uncertainty, investors will continue to reassess their dollar exposure, and that is going to benefit currencies like the euro,” Turner says. “The euro is the most liquid alternative to the dollar.”

Traditionally, the US benefits from what is known as an “exorbitant privilege” in financial markets. Seen as the safest haven by investors, any time the going gets tough, global cash flows into America. It helps the government finance its vast deficits, and funds businesses and households too.

Lagarde wants a slice of the action. A bigger role for the euro would lower borrowing costs, boost Europe’s economies, insulate the Continent from volatile financial markets and “protect Europe from sanctions or other coercive measures”, as she put it.

The ECB chief said: “It would allow Europe to better control its own destiny.”

Making it happen is easier said than done. While Trump has reviled many global investors, that is not enough on its own to push cash into Europe. The bloc needs to become more appealing too.