Features of the euro's role in international financial markets

Three years after the euro's introduction, we discuss its role in foreign exchange and international debt securities markets on the basis of a comprehensive set of data sources. In spot foreign exchange markets the euros role resembles that of the deutschemark, with a dominant position in the Nordic and several Central European countries. Transaction costs in the important dollar-euro market are larger than they used to be for dollar mark, but the same does not hold for any other major spot market. We discuss how this phenomenon may be explained by persistence of bid-ask quoting conventions in this market in the face of changed nominal parities. We show a notable reduction in euro swap trading and explain it, inter alia, with the elimination of dollar swaps meant to hedge exchange rate risk between currencies now subsumed in the euro. We observe strong growth of euro-denominated debt securities, while international euro bond investments are stable at the level of the 'synthetic euro' aggregate of legacy currencies.