Global investors are growing increasingly concerned about the recent trade policy moves made by Washington, according to European Central Bank President Christine Lagarde. This concern has sparked a potential opportunity for the euro to become a strong alternative to the US dollar, but only if the 20-nation bloc can reform its financial and security framework.

The dollar’s value has been declining, reaching a three-year low last month, as investors become wary of US President Donald Trump’s tariff war. Lagarde believes that Washington’s economic policies are driving global investors to rethink their reliance on the dollar. The dollar’s dominance has also been weakened by concerns over the rising US debt and the use of the currency as a geopolitical tool through sanctions and asset freezes.

However, the euro faces its own set of challenges. Since Western sanctions were imposed on Russia in response to the Ukraine conflict in 2022, Moscow and its trade partners have been moving away from both the euro and dollar, opting for national currencies instead. In fact, Russian data shows that 90% of the country’s trade with BRICS members last year was conducted in domestic currencies.

Despite these challenges, Lagarde sees a “prime opportunity” for the euro to grow in influence, driven by trade policy uncertainty under Trump. She stated, “The ongoing changes create the opening for a global euro moment,” but emphasized that the euro “will not gain influence by default – it will have to earn it.” To close the gap with the dollar, Lagarde believes the EU needs to complete its single market, enhance legal consistency, and reform domestic financial systems.

Additionally, boosting the euro’s use in international trade invoicing, improving cross-border payment mechanisms, and building up ECB-led liquidity support would also be beneficial. Lagarde also argued that greater joint financing, including in defense, is necessary to underpin the euro’s standing. “We need stronger military capabilities if we want the euro’s global role to grow,” she stated.

Although the euro is unlikely to challenge the dollar in the near term, holding only a 20% share of global foreign exchange reserves compared to the dollar’s 57.3%, Lagarde’s comments highlight the potential for the euro to become a more significant player in the global economy. As the dollar’s share continues to decline, reaching its lowest level in nearly three decades, the euro may eventually become a stronger alternative. However, for now, the dollar remains the dominant global reserve currency.