The Euro vs. the Dollar: Assessing Currency Dominance in a Shifting World

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The US dollar has been the world’s leading reserve currency since World War II. Currently, it underpins 58 percent of global foreign reserve holdings. In comparison, the euro, the second most utilized currency, only represents 20 percent. This substantial gap highlights the dollar’s entrenched position in the global financial system.

However, recent geopolitical events, notably Russia’s invasion of Ukraine in 2022 and the subsequent intensification of financial sanctions by the G7, have prompted discussions about diversifying away from the dollar. Several nations are now exploring alternatives, leading to questions about the future of dollar dominance and the potential rise of other currencies, including the euro, in international finance.

This analysis, derived from the Atlantic Council’s GeoEconomics Center’s research on dollar dominance, examines the factors contributing to the dollar’s current status, evaluates the euro’s position as a potential challenger, and tracks the progress of BRICS nations in developing alternative financial infrastructures. It provides a framework for assessing the strengths and weaknesses of major global currencies in the evolving international landscape, particularly in the context of the Euro To Dollar relationship.

Dollar Dominance: Still Strong, But Facing Emerging Challenges

Key Takeaways

The US dollar’s position as the leading global reserve currency remains robust in the short to medium term. Despite discussions around dedollarization, the dollar continues to be the dominant currency for foreign reserve holdings, international trade invoicing, and global financial transactions. The euro, while a significant currency, still lags considerably behind the dollar in overall global usage.

No immediate rivals, including the euro, pose a significant threat to the dollar’s dominance. While the dollar’s share of global reserves has seen a gradual long-term decline, these losses have been distributed across multiple currencies, not consolidated by a single competitor like the euro. The euro’s own economic and political challenges limit its capacity to rapidly expand its global role and challenge the dollar’s established network effects.

At the 2024 BRICS Summit, member states supported Russia-led initiatives aimed at facilitating trade and finance in domestic currencies. These agreements, while signaling a desire to move away from dollar dependence, remain intentionally vague on specific mechanisms. The focus on domestic currencies, rather than a direct alternative reserve currency, suggests a gradual, rather than revolutionary, approach to dedollarization.

BRICS nations are exploring financial technology to foster a multipolar global currency system. They are considering leveraging existing financial infrastructure, such as China’s mBridge project, to develop new cross-border payment systems. This signals a long-term ambition to create alternatives to the dollar-centric financial system, potentially opening space for other currencies like the euro to play a larger role in specific regions or sectors.

China is continuously expanding its Cross-Border Interbank Payment System (CIPS) for renminbi settlements. CIPS has experienced an 80% increase in annual transaction volume since 2022 and now connects over 160 countries, including most BRICS members. While CIPS primarily promotes the renminbi, the development of alternative payment systems can indirectly impact the euro to dollar dynamic by reducing overall reliance on the traditional SWIFT system, which is heavily dollar-based.

Former President Trump has expressed strong interest in maintaining dollar dominance, even threatening tariffs against dedollarization efforts. Looking ahead to 2025, BRICS nations are likely to pursue incremental progress on financial infrastructure to avoid direct confrontation with the US. This cautious approach suggests that any shift away from the dollar, and potential rise of the euro or other currencies, will be gradual and influenced by geopolitical considerations.

Tracking the International Use of the Dollar and the Euro

What Makes a Reserve Currency? Comparing the Euro and the Dollar

The qualities that underpin a reserve currency are crucial for understanding the dollar’s enduring dominance and the euro’s position as its main, albeit distant, competitor. The table below outlines six essential characteristics. Analyzing currencies like the euro, alongside those in the IMF’s Special Drawing Rights basket, the Indian rupee, and the Russian ruble, against these criteria demonstrates why the dollar retains its global reserve currency status and highlights the areas where the euro, and other currencies, fall short.

Qualities of a Reserve Currency

BRICS Summit in Kazan and Implications for the Euro-Dollar Balance

The BRICS summit held in Kazan in October 2024 focused on building payment and trade infrastructure to support the use of domestic currencies within the bloc. Two key initiatives emerged: the BRICS Cross Border Payments Initiative (BCBPI) and the Grain Exchange. These initiatives, while primarily aimed at reducing dollar dependence, could also indirectly influence the euro to dollar dynamic in international trade and finance.

The BCBPI encompasses three core projects:

These projects, while offering potential efficiency and cost advantages for BRICS members, are also designed to bypass the US-dominated financial system. This circumvention has implications for sanctions effectiveness and the broader US economic statecraft toolkit. Furthermore, advancements in financial technology are fueling the “de-dollarization” trend among BRICS nations, creating an environment where alternative currencies, including potentially the euro in specific contexts, could gain traction.

Lessons for BRICS from Existing Systems: SPFS, CIPS, and mBridge and the Euro’s Example

FOR A MESSAGING MODEL — SPFS: Russia’s System for Transfer of Financial Messages (SPFS), developed in 2014 as a SWIFT alternative, has expanded to connect 550 organizations across twenty countries, including China and Kazakhstan. Despite US Treasury concerns about sanctions evasion, SPFS lacks SWIFT’s global reach and has operational limitations. The euro, in contrast, benefits from the Eurosystem’s robust and widely accepted payment infrastructure within the Eurozone, offering a more established alternative to dollar-based messaging systems in that region.

FOR A CLEARING SETTLEMENT AND MESSAGING MODEL — CIPS: China’s Cross-Border Interbank Payment System (CIPS), launched in 2015, facilitates renminbi cross-border payments. With 160 direct participants and over 377,000 transactions by 2024, CIPS supports renminbi internationalization and serves as a potential model for BRICS Clear. The euro’s TARGET2 system provides a sophisticated clearing and settlement infrastructure within the Eurozone, demonstrating a mature model for regional currency integration that BRICS might consider, though again, the euro’s global reach beyond Europe is less extensive than the dollar’s.

FOR A DIGITAL CURRENCY MODEL — mBRIDGE: Project mBridge, a cross-border digital payments network connecting Hong Kong, Thailand, the UAE, Saudi Arabia, and China via CBDCs, can manage up to $190 million in annual transactions. With all founding BRICS members piloting CBDCs, mBridge offers a model for BRICS Bridge. The euro’s potential digital euro project represents the Eurozone’s exploration of CBDCs, aiming to maintain the euro’s relevance in the digital age and potentially enhance its international appeal in competition with the dollar and other digital currencies.

Digital Currency and Cross-border Payments

The Grain Exchange initiative could test new financial infrastructures within the BRICS bloc. Global grain price benchmarks are dollar-denominated, even with emerging markets dominating the grain trade. BRICS members collectively possess the liquidity and depth for such an exchange. Successfully establishing this and similar exchanges in non-dollar currencies could incrementally shift trade away from dollar dependence, though the euro’s role in commodity markets would still need to be further developed to present a direct alternative.

However, these BRICS initiatives face hurdles:

Currency management specifics are deliberately avoided. Disagreements among BRICS members regarding economic and political exposures to volatile or rival financial markets hinder detailed currency arrangements. The euro’s own history of navigating diverse economic conditions within the Eurozone offers lessons, both positive and negative, for BRICS in managing a multi-currency system.
Russia’s political motivations dominate proposals. The Kazan Summit Communiqué emphasizes “minimizing disruption” rather than broader financial benefits like reduced transaction costs or price transparency. Russia’s focus on sanctions evasion may not resonate with all BRICS members seeking wider financial advantages. In contrast, the euro’s initial appeal was rooted in economic benefits—reduced transaction costs, price stability—which provided a broader base of support than a primarily geopolitical agenda.
Potential US pushback. Trump’s threat of 100 percent tariffs on BRICS nations supporting alternative currencies signals potential resistance to dedollarization efforts. Some BRICS members will be wary of directly challenging dollar dominance. The euro’s growth as a global currency has also faced periods of skepticism and challenges from the US, highlighting the inherent political dimensions of currency competition.

A Fragmented Approach to Dedollarization and the Euro’s Opportunity

This analysis indicates a somewhat fragmented approach to dedollarization among BRICS nations, driven by diverse national interests and varying levels of willingness to challenge the dollar directly. This environment presents both opportunities and limitations for the euro. While BRICS initiatives may not coalesce into a unified dollar alternative, they could create regional spaces or specific sectors where the euro, or other non-dollar currencies, could play a larger role. Tracking China’s swap lines with BRICS countries and CIPS membership provides insights into the evolving alternative financial infrastructure and its potential impact on the euro to dollar balance in international finance.

Acknowledgements

Research team: Mrugank Bhusari and Alisha Chhangani
Thank you to Maia Nikoladze for her foundational work on this project.
Contributions from: Mondrita Rashid, Israel Rosales, Ryan Murphy, and Grace Kim
Project editors: Josh Lipsky, Kimberly Donovan, Charles Lichfield, and Ananya Kumar
Visual design: Nancy Messieh, Andrea Ratiu, and Michael Currie