The Bull

Tuesday 11

December, 2018 3:15 AM



EU seeks to reduce dependence on US dollar

EU seeks to reduce dependence on US dollar

The EU is looking for ways to reduce its reliance on the US dollar for the performance of its own currency, the euro. The US has worried the EU with its stance on Iran, and the allies have made it clear that they disagree on foreign policy decisions.

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By Oliver King 06.12.2018

The EU is looking for ways to reduce its reliance on the US dollar for the performance of its own currency, the euro. The US has worried the EU with its stance on Iran, and the allies have made it clear that they disagree on foreign policy decisions.

One of the main issues for the EU is that it still backs the Iran nuclear deal signed off on by US President Donald Trump's predecessor Barack Obama. However, Trump's more protectionist outlook has seen a series of sanctions imposed on Iran. These same measures also affect any country that deals with the Middle Eastern nation, so if the EU has a serious reliance on the dollar, then any ties with Iran will affect its currency heavily.

This poses a problem for the 28-member bloc ideologically, and it now wants to find ways to form stronger ties with other countries and reduce the amount of foreign debt left exposed to a volatile euro to dollar forex pair.

Many companies from the EU have now pulled out of Iran due to concerns that US sanctions will heavily impact their businesses, and there is little expectation for an immediate fix regarding what could become a diplomatic and very public standoff.

One of the only ways that the EU will be able to fight off sanctions, while also staying on good terms with Iran to maintain stability in the region, is by increasing its level of trade with the country. However, it can only do so when it manages to limit exposure to the dollar. Otherwise, the EU will likely find its market being shorted.

Since the US announced that it was going to levy such sanctions, it has also emerged that the country can apply punitive secondary measures to any European companies operating in the US. If these companies deal with Iran, then they will face fines at a minimum.

Conscious of how these developments could affect the ability of European businesses to operate in the Middle East, particularly due to the prevalence of global supply chains, the EU is now making a serious effort to reduce its reliance on the dollar as quickly as possible.

The European Commission wants to go further than that and has the intention of trying to "de-dollarize" the world economy. Many emerging markets, as well as established ones such as Australia, tend to link with the dollar in world markets. Therefore, when investors flee what they believe are unstable currencies, they run to the dollar. The EU is aware of this and wants to protect its member states as much as possible.

One area where its plans may take hold is in the energy sector. The EU hopes that it can start to carry out agreements in euros rather than in dollars. The European Commission has said that it will look to introduce "a full range of trustworthy interest rate benchmarks" in addition to an instant payment system to rival US banking systems as the go-to payment transaction mechanism facilitation option.

Pierre Moscovici, the EU's Economic Affairs Commissioner, said that "a wider use of the euro in the global economy" is important as the bloc shifts focus away from the US dollar by protecting "against external shocks and making the international finance and monetary system more resilient."

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