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The Euro's Challenge to the Dollar

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  • Ewe-Ghee Lim

Abstract

This paper examines opposing views on the euro''s challenge to the dollar as an international currency. One view emphasizes Europe''s large economy and diversification effects as undergirding a vigorous challenge. The other emphasizes "network externalities," particularly undergirding continued dollar dominance. The data to date support the second view but also show the euro has significantly overtaken the legacy currencies as a reserve currency. Generally, large economic size alone is insufficient to challenge the network externalities supporting vehicle currencies, but scope exists for the euro to advance as an international store of value. The paper discusses the euro''s medium-term prospects.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/153.

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Length: 40
Date of creation: 01 Jun 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/153

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Keywords: Euro; Foreign exchange reserves; International bond markets; foreign exchange; international currency; bonds; international currencies; exchange rates; bond; foreign exchange markets; financial markets; international bond; exchange reserves; exchange markets; bond markets; exchange rate; financial system; international bonds; foreign exchange market; currency markets; denominated bonds; financial institutions; dollar exchange rates; exchange market activity; international financial system; exchange rate volatility; international financial statistics; international finance; current accounts; exchange rate arrangements; currency appreciation; financial systems; history of exchange rate; foreign exchange transactions; financial innovation; hedge; home currency; dollar bonds; domestic ? bonds; financial services; exchange transactions; exchange rate changes; currency crisis; exchange rate fluctuations; international reserves; financial market; currency of denomination; stable exchange rates; exchange rate adjustments; future value;

References

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  1. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  2. Jorge Iván Canales Kriljenko & Cem Karacadag & Roberto Pereira Guimarães, 2003. "Official Intervention in the Foreign Exchange Market," IMF Working Papers 03/152, International Monetary Fund.
  3. Barry Eichengreen, 2005. "Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition," NBER Working Papers 11336, National Bureau of Economic Research, Inc.
  4. Maurice Obstfeld & Kenneth Rogoff & Richard Clarida, . "The Unsustainable US Current Account Position Revisited," Working Paper 14901, Harvard University OpenScholar.
  5. Black, Stanley W., 1991. "Transactions costs and vehicle currencies," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 512-526, December.
  6. Kenen, Peter B., 2002. "The euro versus the dollar: will there be a struggle for dominance?," Journal of Policy Modeling, Elsevier, vol. 24(4), pages 347-354, July.
  7. Paul R. Krugman, 1979. "Vehicle Currencies And the Structure Of International Exchange," NBER Working Papers 0333, National Bureau of Economic Research, Inc.
  8. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  9. G Alogoskoufis & R Portes & H Rey, 1998. "The Emergence of the Euro as an International Currency," CEP Discussion Papers dp0388, Centre for Economic Performance, LSE.
  10. Chrystal, K Alec, 1977. "Demand for International Media of Exchange," American Economic Review, American Economic Association, vol. 67(5), pages 840-50, December.
  11. Bergsten, C. Fred, 2002. "The euro versus the dollar: will there be a struggle for dominance?," Journal of Policy Modeling, Elsevier, vol. 24(4), pages 307-314, July.
  12. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
  13. Gerald P. Dwyer Jr. & James R. Lothian, 2003. "The Economics of International Monies," International Finance 0311010, EconWPA.
  14. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
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Citations

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Cited by:
  1. Aristovnik, Aleksander & Čeč, Tanja, 2010. "Compositional Analysis Of Foreign Currency Reserves In The 1999-2007 Period. The Euro Vs. The Dollar As Leading Reserve Currency," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 165-181, March.
  2. Thammarak Moenjak & Kengjai Watjanapukka & Oramone Chantapant & Teeravit Pobsukhirun, 2010. "New Globalization: Risks and Opportunities for Thailand in the Next Decade," Working Papers 2010-04, Economic Research Department, Bank of Thailand.
  3. Lane, Philip R. & Shambaugh, Jay C, 2007. "Financial Exchange Rates and International Currency Exposures," CEPR Discussion Papers 6473, C.E.P.R. Discussion Papers.
  4. Gabriele Galati & Philip Wooldridge, 2009. "The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-23.
  5. Beck, Roland & Rahbari, Ebrahim, 2008. "Optimal reserve composition in the presence of sudden stops: the euro and the dollar as safe haven currencies," Working Paper Series 0916, European Central Bank.
  6. Ewe-Ghee Lim, 2007. "Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Rebalancing Strategy? An Econometric Study Using COFER Data," IMF Working Papers 07/293, International Monetary Fund.
  7. Hyoung-kyu Chey, 2013. "The Concepts, Consequences, and Determinants of Currency Internationalization," GRIPS Discussion Papers 13-03, National Graduate Institute for Policy Studies.
  8. Aideen Morahan & Christian B. Mulder, 2013. "Survey of Reserve Managers," IMF Working Papers 13/99, International Monetary Fund.
  9. Elias Papaioannou & Richard Portes, 2008. "The international role of the euro: a status report," European Economy - Economic Papers 317, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  10. Anna Wong, 2007. "Measurement and Inference in International Reserve Diversification," Working Paper Series WP07-6, Peterson Institute for International Economics.

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