Nov. 29 — The euro, trading near a record high, is unlikely to replace the dollar as the world’s dominant reserve currency because the eurozone’s financial markets remain fragmented, Bank of America Corp. said.

Europe’s single currency is used by 13 nations in the region though the U.K., the second biggest economy, has so far rejected it and other countries are excluded from it. The currency’s gains, up 11 percent this year versus the dollar, has led French President Nicolas Sarkozy and Italian Prime Minister Romano Prodi to express concern about its strength.

“The monetary union is a potentially fragile construction, with no credible political unity,” Gilles Moec, a senior economist in London at the second-largest U.S. bank, wrote in a research note yesterday. “A shift from the U.S. dollar to the euro could entail costs which the heterogeneous Eurozone would probably be unwilling to bear.”

The euro traded at $1.4829 as of 7:51 a.m. in London, after touching a record high of $1.4967 on Nov. 23.

Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo, confirmed the report today.

The dollar depreciated in five of the past six years leading central bankers from the Arabian Peninsula to China to diversify their reserves and increase holdings of non-U.S. assets. The dollar made up 64.8 percent of central banks’ currency reserves in the second quarter, down from 71 percent in 1999, the year the euro made its debut, according to the International Monetary Fund. The euro accounts for 25.6 percent.

Dollar’s `Brutal’ Drop

“The status of the U.S. dollar as the dominant reserve currency is increasingly put to test,” Moec wrote. However, the euro is not “ready and not willing to be the dominant reserve currency.”

The Fed’s trade-weighted major currency index fell to 71.11 on Nov. 7, the lowest since the era of free-floating currencies started in 1971. Against the yen and European currencies, the dollar is now worth about a third of what it was in the days of fixed rates.

European Central Bank President Jean-Claude Trichet said Nov. 8 that the decline in the dollar has been “brutal,” while French President Nicolas Sarkozy told a joint session of the U.S. Congress a day before that the Bush administration must stem the dollar’s plunge or risk a trade war.

The euro rose 0.3 percent on Oct. 10, when ECB policy maker Christian Noyer said the euro’s “strength” shows the single currency has become a “safe haven” for international investors.

Euro Disagreement

Whilst Sarkozy and Prodi complain about the currency’s gains, German Finance Minister Peer Steinbrueck said Oct. 8, “I prefer a strong euro.”

“The eurozone probably lacks the political strength that a reserve currency issuer should supply,” Moec said. “Beyond the monetary agreement, economic strategies among member states are only loosely coordinated. As a confederate currency, the euro will always entail the risk of secession at some point.”

In July 2005, Silvio Berlusconi who was then Italian Prime Minister, called the euro a “disaster,” blaming it for Italy’s economic slump. His party has called for the nation to pull out of the currency.