Global investors are worried about Washington's recent trade policy moves, the European Central Bank chief has said

The euro could become a strong alternative to the US dollar if the 20-nation bloc could reform its financial and security framework, European Central Bank President Christine Lagarde said on Monday.

The dollar tumbled to a three-year low last month as market jitters mounted over US President Donald Trump's tariff war. Lagarde has asserted that Washington's economic policies are pushing global investors to rethink their reliance on the greenback.

The dollar's dominance has also been increasingly undermined due to concerns over soaring US debt and Washington's use of the currency as a geopolitical weapon by imposing sanctions and freezing assets.

However, the euro faces similar problems. Since Western sanctions were imposed on Russia in response to the Ukraine conflict in 2022, Moscow and its trade partners have increasingly moved away from both the euro and dollar in favor of national currencies. Russian data indicates that 90% of the country's trade with BRICS members last year was conducted in domestic currencies.

Despite this, Lagarde pointed to a "prime opportunity" for the euro to grow in influence, referencing trade policy uncertainty under Trump as a key factor behind investor concern. "The ongoing changes create the opening for a global euro moment," she said. "But the euro will not gain influence by default - it will have to earn it."

Lagarde emphasized that to close the gap with the dollar, the EU would need to complete its single market, enhance legal consistency, and reform domestic financial systems. Boosting the euro's use in international trade invoicing, she added, would also help, alongside improving cross-border payment mechanisms and building up ECB-led liquidity support. 

She 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.

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However, the euro is unlikely to challenge the dollar in the near term. The currency currently holds a 20% share of global foreign exchange reserves - well behind the dollar's 57.3% - according to the International Monetary Fund. While the dollar's share has steadily declined to its lowest level in nearly three decades, it still remains the dominant global reserve currency.