Debt crisis shrinks global demand for euro
The euro's share among currency reserves held globally by central banks fell to 23.9 per cent.
International use of the euro slipped last year because of the debt crisis in Europe, while the US dollar held its own as the world's leading currency for reserves held by central banks.
Currencies not traditionally used as reserves, such as the Canadian and Australian dollars, gained in favour as those countries enjoyed steady growth and lower debt than major economies.
The European Central Bank (ECB) said Tuesday that the euro's share among currency reserves held globally by central banks fell to 23.9 per cent in 2012 from 25.1 per cent the previous year.
The dollar's share was little changed at 61.9 per cent.
The ECB said the financial crisis that has afflicted the 17-country eurozone was a factor discouraging use of the euro for reserves, which are often held in the form of government bonds.
Lending across borders in the eurozone has dropped, diminishing the liquidity that reserve holders like to see. Lower liquidity means there are fewer buyers and sellers readily found.
The eurozone countries have struggled with heavy levels of public debt - Greece, Portugal, Ireland and Cyprus have needed financial rescue.
Even larger economies like Spain and Italy have worryingly high debt. Concern over that debt eased only after the European Central Bank came up with a plan to buy the government bonds issued by countries that promise to reform.
Less borrowing in euros
In its annual report on international use of the euro, the ECB also found that there was less borrowing in euros internationally by companies because they could get lower interest rates by selling bonds denominated in US dollars.
Countries hold reserves of foreign currency to help backstop their own currencies' value in case of a financial crisis and for trade purposes.
The country issuing the reserve currency can benefit because demand from abroad supports its exchange rate and can mean lower borrowing costs for the government, as has been the case with the US dollar in its role as the leading reserve currency.
Demand for dollars in the form of US Treasury bonds by other countries, such as China, helps keep down the interest rate that the US government pays to borrow. Money that is not spent on interest can be spent on other things, or saved.
A key finding of the report was that non-traditional reserve currencies such as the Canadian dollar and the Australian dollar are in greater demand because of their growing economies and better public finances. There have been concerns about government debt not only in Europe but also in the countries that issue the world's other traditional reserves United States, Japan and Britain.
The category of 'other' currencies saw its share of officially disclosed reserves increase from 5.7 per cent to 6.1 per cent, ahead of both the yen at 3.9 per cent and the pound sterling at 4.0 per cent.
The ECB said that the 'other' category's share is the highest since the early 1970s, when the earlier international currency system set up at the Bretton Woods conference in 1944 collapsed.
The ECB said, however, that the use of such non-traditional currencies might slow if major economies start reducing debt and deficits.
Such currencies are also of limited use, the ECB said, because they are less liquid — there are fewer debt securities and other ways of holding them available, meaning finding a seller or a buyer can be more difficult.
The ECB said the Chinese currency, the renminbi, had shown impressive gains in foreign trade, with the share of trade in goods settled in renminbi rising from near zero to almost 10 per cent in 2012.
The ECB said the renminbi's widespread use as a reserve currency was hindered by China's lack of fully developed financial markets and by its investment and foreign-exchange controls.