FRANKFURT (Reuters) - Use of the euro as an international currency has declined over the past year, primarily due to concerns over political risk and the increased use of emerging market currencies, such as the Chinese renminbi, the European Central Bank said on Wednesday.
The biggest drop was recorded in the use of the euro as a funding currency, mostly due to the high cost of hedging against a fall in its value using swaps.
"The very simple message is that the euro has continued to lose ground as an international currency," ECB board member Benoit Coeure said on Wednesday. "But the euro is unchallenged as the second most important currency in the international monetary system."
However, central banks still increased their reserves in euros, partially reflecting views that the bloc is slowly moving past its protracted debt crisis.
Reflecting the growing importance of the Chinese currency, the ECB placed around 500 million euros worth of its foreign currency reserves into renminbi earlier this year and Coeure said this may be followed up by further purchases.
"We believe that he renminbi has a role in a diversified portfolio," Coeure told a news conference, calling the ECB's purchase a first step.
"We want our reserves to be liquid and readily available. If that step is successful, we’ll do more, at a later stage," he added.
Almost 20 percent of foreign reserves were held in euros globally at the end of last year and Coeure said data suggested this may continue to rise.
The U.S. dollar remained by far the world's most important currency, holding just below two thirds of the global market for international debt, international loans and foreign reserves, the ECB's data showed.
"The international role of the euro is primarily determined by market forces and the Eurosystem neither hinders nor promotes the international use of the euro," ECB President Mario Draghi said in the report.
"At the same time, the ECB will continue to monitor developments and publish information on the international role of the euro on a regular basis."
Reporting by Balazs Koranyi and Padraic Halpin; Editing by Francesco Canepa