Key Takeaways
- The US Dollar Index lost 11% in 2025, and investors see continued declines ahead.
- The dollar’s pullback offers a strategic opening for the euro, which remains the world’s second most-held reserve currency.
- Eurobonds, digital euro, and global trade could be the key drivers that strengthen the global position of the euro.
For nearly eight decades, the US dollar has served as the backbone of global finance—backing oil trades, anchoring central-bank reserves, and providing a safe haven in times of crisis. As a growing number of nations are settling energy deals in other currencies and central banks from China to Brazil are reducing their dollar holdings, record US debt is testing investor confidence. Together, these shifts suggest that the greenback’s once-unquestioned dominance may be vulnerable.
Signs of a weakening trend have been visible in market benchmarks. The US Dollar Index (DXY), which measures the greenback against a basket of major currencies, has slipped roughly 11% since the start of the year, retreating from multi-year highs reached in 2022. The first six months of 2025 marked the worst half-year performance for the US dollar since 1991.
Is This the Euro’s Moment to Shine?
There are compelling reasons to believe the euro could play a larger international role, as the current global climate plays to the euro’s advantage, and as countries facing high tariff rates seek to diversify away from the dollar.
“With the changing global economic order and the emergence of new centers of power, the question of which currencies will dominate the future takes on great significance, and the supremacy of the dollar should no longer be taken for granted,” says Claudio Wewel, FX strategist at J. Safra Sarasin.
Europe’s joint debt issuance during the pandemic, and continued efforts to deepen fiscal integration have expanded the supply of high-quality euro-denominated assets, making the currency more attractive to central banks seeking diversification. If the European Union can maintain economic stability and advance long-discussed financial reforms, the euro could gradually expand its global footprint—though most economists caution that matching the dollar’s liquidity and political backing remains a long-term challenge rather than an imminent shift.
So far, however, there has not been a global rush to the euro. According to IMF statistics, the dollar accounted for roughly 58% of disclosed global reserves in the second quarter of this year, down from more than 70% at the turn of the century. The euro accounts for 20% of global foreign exchange reserves, a share it has maintained steadily in the last decade.
“The euro has failed to take advantage of the decline in the share of the dollar in global official FX reserves,” says Michael Diamantopoulos, associate director of fixed income and currency at Morningstar, as “its gain in market share for international debt financing has been offset by a slight decline in invoicing of exported goods.”
“As fiscal dominance concerns intensify, and central banks’ independence around the world have been questioned, the ECB’s credibility becomes invaluable,” he says.
So, a weak dollar does not automatically equate to a decline in the dollar’s dominance. Nevertheless, J. Safra Sarasin’s Wewel believes “the euro is emerging as a credible alternative” and indicates three factors that should strengthen the role of the euro in global markets: Eurobonds, digital euro, and global trade.
High Hopes for Eurobonds
“The deep and liquid US Treasury securities market is one of the key factors underpinning the dollar’s dominant role as a reserve currency,” says J. Safra Sarasin’s strategist.
Despite the name, Eurobonds are debt instruments issued internationally in a foreign currency but not necessarily in euros. Rather they are issued in currency pairs such as eurodollar, eurosterling or euroyen.
“Exchanging national government bonds for Eurobonds up to a threshold of 25% of local GDP would create a market worth EUR 5 trillion, a size that would offer sufficient liquidity to investors, while still being perceived as safe. Once demand from global investors increases, this will likely push Eurobond yields below those of national government bonds.”
However, Wewel recognizes that “Eurobonds remain politically controversial and continue to face political opposition from Germany and the Nordic countries,” and that “further progress toward fiscal union and improved control measures will be necessary to ensure fiscal discipline.”
According to a report published in June 2025 by the ECB, focusing on the international role of the euro, said “the number one priority must be advancing the savings and investment union to fully leverage European financial markets.”
“Eliminating barriers within the EU is essential to enhancing the depth and liquidity of euro funding markets, which is a precondition for the wider use of the euro. The planned issuance of bonds at the EU level—as Europe takes charge of its own defense—could make an important contribution to achieving these objectives,” it added.
How the Digital Euro Could Challenge Dollar Dominance
Accelerating the development of the digital euro, which began in 2021, could be another way to increase demand for the euro. Considering recent initiatives by the Trump administration, aimed at promoting the use of dollar-backed stablecoins, progress on this front will be particularly important, according to J. Safra Sarasin’s Wewel.
Indeed, by promoting the global use of such stablecoins, the US seeks to reinforce dollar dominance worldwide. Because a currency’s global standing depends heavily on its use in payments, Trump’s move seeks to bolster the dollar’s dominance in cross-border transactions and invoicing. US dollar stablecoins, largely backed by Treasury debt, in turn fuel extra demand for dollar-denominated debt issued by the government and potentially by private borrowers.
The EU isn’t waiting for these developments to play out. “The digital euro backed by the ECB would be free from insolvency risk, representing a competitive advantage over private stablecoins backed by the dollar,” says Wewel. Finally, the digital euro “would strengthen monetary and strategic autonomy and reduce dependence on non-European payment systems, such as US credit card companies or Big Tech wallets, while improving transaction transparency and supporting anti-money laundering efforts.”
Trade Shifts: Why a Weak Dollar Could Boost the Euro’s Global Role
US President Donald Trump’s trade wars are weakening trade ties between the United States and its traditional allies and partners. Wewel believes that this represents “a unique opportunity for the euro area to strengthen its role and share in world trade.”
Although J. Safra Sarasin’s strategist expects Middle Eastern oil exporters to continue to prefer payments in US dollars, the adoption of the euro could become popular for trade in sectors where the euro area has a competitive advantage, such as machinery, pharmaceuticals, or green technologies.
“Like US Treasuries, European assets could also benefit from a convenience yield, a premium that investors are willing to pay to hold a highly liquid and safe asset,” says Wewel.
US Dollar Outlook: Why the Decline May Continue
“Despite the euro approaching its fair value, having spent the last ten years in undervalued territory, we expect further appreciation in the medium term against the US dollar,” says Morningstar’s Diamantopoulos. At the same time, “the dollar remains overvalued according to our metrics,” he adds.
“Further depreciation becomes increasingly likely in the years ahead in the face of waning US economic exceptionalism, which could lead to reduced foreign investment and hedging-related outflows, persistent current account and debt pressures, and ever-growing concerns over the Fed’s independence,” Diamantopoulos says.
