Ukraine considers switching to the euro as its reference currency

Ukraine is considering moving away from the US dollar and more closely linking its currency to the euro, National Bank President Andriy Pyzhny told Reuters. The reasons for this are the fragmentation of global trade and growing ties with Europe.

The possible accession to the European Union, a “strengthening of the EU’s role in securing our defense capabilities, greater volatility in global markets and the likelihood of fragmentation of world trade” would lead the Ukrainian central bank to review whether the euro should be used as the reference currency instead of the dollar in the future, explained the head of the Ukrainian central bank, Pyschnyj.

"This work is complex and requires high-quality, multifaceted preparation," he added. These are the most direct statements by a Ukrainian official regarding a possible currency changeover for the Ukrainian hryvnia.

The dollar dominates international trade and accounts for the majority of global reserves. Major economies such as Saudi Arabia and Hong Kong peg their currencies to the dollar.

The trade war sparked by US President Donald Trump is causing some observers to question the future role of the dollar as a global reserve currency.

Since Trump's return to the White House, the US dollar has lost more than 9 percent of its value against several major currencies as investors withdraw from US assets.

Some experts caution against linking the dollar's strength to its reserve currency status. Historically, dollar holdings have been intertwined with security alliances and military ties to Washington.

Transactions in the US dollar continue to dominate all segments of the foreign exchange market, according to Pyschnyj, but the share of transactions denominated in euros has increased in most segments, albeit "moderately so far."

US dollar as reference currency

Ukraine introduced the hryvnia in 1996 and used the dollar as its reference currency for decades.

Immediately after Russia's invasion in February 2022, the central bank imposed capital controls and fixed the hryvnia at an official exchange rate of approximately 29 to the US dollar. Due to increasing fiscal imbalances, Ukraine was later forced to devalue.

In October 2023, the central bank switched from a fixed peg to a managed exchange rate system that uses the US dollar as a benchmark for foreign exchange market interventions and to smooth exchange rate fluctuations.

Proximity to the EU

The EU began accession talks with Ukraine and Moldova almost a year ago, but there is still a long and rocky road to accession.

EU Commission President Ursula von der Leyen stated in February that Ukraine could join by 2030 if it continues to reform its political and judicial systems at the current pace.

In preparation for this, Moldova changed its reference currency from the dollar to the euro on January 2.

According to Pyschnyj, a revival of investment and consumption thanks to closer ties with Europe and a normalization of the economy would help economic growth pick up slightly to 3.7 to 3.9 percent over the next two years, although much of the economic development depends on the further development of the conflict.

“A rapid end to the war would clearly be a positive scenario with good economic results if it included security guarantees for Ukraine,” Pyshny said.

“Nevertheless, one must be aware that it will probably take some time for the economic benefits of an end to the war to become fully apparent.”

Ukraine relies on external financing to cover the costs of the war. Pyshnyi expects $55 billion this year, which will not only cover the budget deficit but also serve as a reserve for public finances in the coming years, when aid is expected to decline.

“We expect Ukraine to receive about $17 billion in 2026 and about $15 billion in 2027,” Pyshnyj said.