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Review of the International Role of the Euro, December 2002

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Review of the International Role of the Euro, December 2002 EN EUROPEAN CENTRAL BANK EUROPEAN CENTRAL BANK EUROPEAN ECB EZB EKT BCE EKP REVIEW OF THE INTERNATIONAL ROLE OF THE EURO December 2002 REVIEW OF THE INTERNATIONAL ROLE OF THE EURO December 2002 THE EURO OF ROLE THE INTERNATIONAL REVIEW OF EUROPEAN CENTRAL BANK REVIEW OF THE INTERNATIONAL ROLE OF THE EURO December 2002 © European Central Bank, 2002 Address Kaiserstrasse 29 D-60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 D-60066 Frankfurt am Main Germany Telephone +49 69 1344 0 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. As at October 2002. ISSN 1725-2210 Table of contents Foreword 7 Executive summary 9 Introduction 12 A. The euro in global markets 13 1 The euro in international debt markets 13 1.1 The supply side 14 1.2 The demand side 19 1.3 Some structural aspects of two specific market segments 26 2 The euro in foreign exchange markets 29 2.1 Trading volumes 29 2.2 Vehicle currency role 32 2.3 Transaction costs 33 2.4 Developments in the EUR/JPY market 36 3 The euro in international trade in goods and services 39 B. The euro in third countries 43 1 Official use: the euro in third countries’ exchange rate policies 43 1.1 The euro as an anchor currency 43 1.2 The euro as a reserve currency 45 1.3 The euro as an intervention currency 47 2 Private use: the euro as a parallel currency in third countries 48 2.1 Currency substitution – the use of euro cash outside the euro area 48 2.2 Asset substitution – the use of euro-denominated bank deposits 50 C. A comparison with the US dollar and other international currencies 53 D. A euro area perspective: monetary policy implications 55 Conclusions 57 Key data sheet 58 References 59 ECB • Review of the international role of the euro • December 2002 3 List of charts, tables and boxes Charts Chart A.1: Broadly defined international debt securities: currency shares 16 Chart A.2: Narrowly defined international debt securities: currency shares 17 Chart A.3: Euro-denominated bond and note issues by non-euro area residents over the review period: breakdown by issuer type 18 Chart A.4: Euro-denominated bond and note issues by non-euro area residents over the review period: regional breakdown 19 Chart A.5: Currency shares in the bond portfolios of large fund managers 21 Chart A.6: Net purchases by US residents of foreign-issued bonds 23 Chart A.7: Net purchases by Japanese residents of foreign-issued bonds 23 Chart A.8: TRAX reporting system: currency breakdown of monthly turnover 24 Chart A.9: Net purchases by selected euro area countries of bonds and notes issued outside the euro area 25 Chart A.10: Traded/tradable spot foreign exchange bid-ask spreads 35 Chart A.11: USD/DEM(EUR) exchange rate and bid-ask spreads 36 Chart A.12: Correlations between the EUR/JPY, JPY/USD and USD/EUR as measured by implied angles 38 Chart A.13: Quantile distribution of the quoted bid-ask spreads on Reuters for the EUR/JPY rate 38 Chart A.14: Share of the euro in trade of goods and services for Belgium and Luxembourg and France 39 Chart A.15: Share of the euro in trade of goods and services for Portugal and Spain 40 Chart A.16: Share of the euro and the US dollar in the trade of Bulgaria 40 Chart A.17: Share of the euro and the US dollar in the trade of Poland 41 Chart A.18: Share of the euro in the trade of the European Union with Japan 41 Chart B.1: Global foreign exchange reserves 46 Chart B.2: Net shipments of euro banknotes to destinations outside the euro area 49 Chart B.3: Volume of cash transactions in US dollars and euro in Russia 50 Chart B.4: Changes in euro-denominated bank deposits 51 Tables Table A.1: Shares of the major currencies in debt securities supply 14 Table A.2: Relative sizes of international market segments in global debt securities supply 15 Table A.3: Major currencies’ shares in long-term and short-term international debt securities flows (broad definition) 17 Table A.4: Major currencies’ shares in long-term and short-term international debt securities flows (narrow definition) 18 Table A.5: Currency breakdown of funds under management according to the eMaxx database 22 Table A.6: Some characteristics of the six largest euro-denominated bond issues by non-euro area residents 27 Table A.7: List of non-euro area issuers of the top 100 euro-denominated bonds 28 Table A.8: Currency composition of spot foreign exchange trading volume 30 Table A.9: Currency composition of swap foreign exchange trading volume 31 Table A.10: Currency composition of total foreign exchange trading volume 32 4 ECB • Review of the international role of the euro • December 2002 Table A.11: Regional roles of the US dollar and the euro/Deutsche Mark in the interbank spot foreign exchange market 33 Table A.12: Share of energy and raw materials in euro area trade in goods 42 Table B.1: Countries with exchange rate regimes linked to the euro 44 Table B.2: Share of national currencies in total identified official holdings of foreign exchange reserves 46 Table B.3: Currency breakdown of total foreign exchange reserves of selected countries 47 Table B.4: Frontloading of euro banknotes outside the euro area 50 Table B.5: Outstanding euro-denominated bank deposits in selected countries 52 Table C.1: The international role of the euro and other international currencies: some key indicators 53 Table C.2: Gross domestic product of selected OECD countries 54 Boxes Box 1: Technical aspects related to the debt securities data 13 Box 2: Challenges related to the interpretation of developments in international debt markets 20 Box 3: The euro in the City of London 24 Box 4: Euro-denominated benchmarks in emerging markets 29 Box 5: The recent academic debate on USD/EUR spreads in the foreign exchange market 34 Box 6: Geometry of currencies: graphical interpretation 37 ECB • Review of the international role of the euro • December 2002 5 6 ECB • Review of the international role of the euro • December 2002 Foreword The euro, the single currency of the euro financial system, financial markets and third area, also plays a significant role in financial countries’ policies. markets and third countries outside this area. Part of this international role has been It is in the international debt securities inherited from the euro’s legacy currencies, markets that the international role of the in particular the Deutsche Mark. However, euro has grown most noticeably. The report the advent of European Economic and finds that this has been the result of Monetary Union (EMU) has given the a growing supply of euro-denominated international role of the euro a new impetus, securities issued by internationally active compared to that of its legacy currencies, corporations, coupled with ongoing demand through the creation of a single large for international euro-denominated assets by economic entity and the integration of its euro area residents. domestic financial markets. This report – focusing on developments in 2001 and the The ECB intends to continue its monitoring first half of 2002 – offers new evidence that of the international role of the euro and to the international role of the euro has grown, provide regular information to the public on although gradually, since the launch of the related developments in the international third stage of EMU on 1999. financial arena. The report reflects the ongoing efforts of the ECB to monitor and analyse the international role of the euro. In doing so, it not only provides information on the international use of the currency, i.e. its use by market participants and authorities outside the euro area, but also sheds some light on ongoing Willem F. Duisenberg structural developments in the international President of the European Central Bank ECB • Review of the international role of the euro • December 2002 7 8 ECB • Review of the international role of the euro • December 2002 Executive summary 1. This is the 2002 review of the (iv) on the use of the euro in third international role of the euro. It examines countries, the review has been the role of the euro in global markets enriched with data on the currency and countries outside the euro area and composition of foreign exchange aims to enhance the Eurosystem’s reserves in selected countries. understanding of the current state of the Moreover, it includes information on internationalisation of the euro and to the role of the euro as a parallel identify the main developments and currency in certain countries outside underlying trends. the euro area, compiled in the context of the 2002 euro cash 2. This year’s review also reflects a further changeover. development of the analytical apparatus and statistical coverage with regard to 3. To integrate these new datasets and to the euro’s international role. Accordingly, focus more directly on the environment it contains a number of new results and in which the euro’s international role is datasets: developing, the structure of the review has been slightly modified to deal with (i) for the international debt markets, the role of the euro, first, in global data are now included on: the markets (including capital markets, regional and sectoral breakdowns foreign exchange markets and of international issuers of euro- international markets for trade in goods denominated bonds; some features of and services) and, second, in third the largest bond issues; the role of countries, as an anchor, reserve, the euro in emerging market issues intervention or parallel currency.
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