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The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?

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  • Gabriele Galati

    (De Nederlandsche Bank, The Netherlands)

  • Philip Wooldridge

    (Bank for International Settlements, Hong Kong)

Abstract

Well-developed financial markets are a necessary condition for a currency to play a role as a reserve currency. The introduction of the euro greatly improved the functioning of euro financial markets. This paper investigates whether euro financial markets have developed sufficiently to facilitate the emergence of the euro as a reserve currency on par with the US dollar. We find that the liquidity and breadth of euro financial markets are fast approaching those of dollar markets, and as a result the euro is eroding some of the advantages that have historically supported the pre-eminence of the US dollar as a reserve currency. This strengthens the incentive for monetary authorities to reconsider the currency composition of their reserves. Nevertheless, the introduction of the euro has not yet resulted in a significant change in the currency composition of official reserve holdings. The US dollar has maintained its place as the dominant reserve currency, supported perhaps by the edge that dollar financial markets still have over euro markets in terms of size, credit quality, and liquidity, as well as inertia in the use of international currencies. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.379
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 1 ()
Pages: 1-23

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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:1:p:1-23

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Cited by:
  1. Anna Wong, 2007. "Measurement and Inference in International Reserve Diversification," Working Paper Series WP07-6, Peterson Institute for International Economics.
  2. Yosuke Tsuyuguchi & Philip D Wooldridge, 2008. "The evolution of trading activity in Asian foreign exchange markets," BIS Working Papers 252, Bank for International Settlements.
  3. Menzie D. Chinn & Jeffrey A. Frankel, 2008. "The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency," NBER Working Papers 13909, National Bureau of Economic Research, Inc.
  4. Bank for International Settlements, 2008. "FX reserve management: trends and challenges," BIS Papers, Bank for International Settlements, number 40, 6.
  5. Ryan, John, 2009. "China and the Reserve Currency Question," MPRA Paper 18218, University Library of Munich, Germany.
  6. Aristovnik, Aleksander & Čeč, Tanja, 2009. "Compositional Analysis of Foreign Currency Reserves in the 1999-2007 Period : The Euro vs. The Dollar as Leading Reserve Currency," MPRA Paper 14350, University Library of Munich, Germany.
  7. Costabile, Lilia, 2009. "Current global imbalances and the Keynes Plan: A Keynesian approach for reforming the international monetary system," Structural Change and Economic Dynamics, Elsevier, vol. 20(2), pages 79-89, June.
  8. Gunther Schnabl, 2006. "The Evolution of the East Asian Currency Baskets – Still Undisclosed and Changing," CESifo Working Paper Series 1873, CESifo Group Munich.
  9. John Ryan, 2009. "China and the Global Roles of Currencies," Working Papers 2009.8, International Network for Economic Research - INFER.
  10. Jørgen Hansen & Roswitha King & Virmantas Kvedaras, 2011. "The International Reserves Issue in the EMU," Open Economies Review, Springer, vol. 22(1), pages 143-161, February.
  11. Pietro Alessandrini & Andrea Presbitero, 2012. "Low-Income Countries and an SDR-based International Monetary System," Open Economies Review, Springer, vol. 23(1), pages 129-150, February.
  12. Schnabl, Gunther & Freitag, Stephan, 2009. "An asymmetry matrix in global current accounts," Working Papers 76, University of Leipzig, Faculty of Economics and Management Science.
  13. Ciner, Cetin, 2011. "Information transmission across currency futures markets: Evidence from frequency domain tests," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 134-139, June.

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