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The Euro's Challenge to the Dollar: Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data

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

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Length: 40 pages
Date of creation: 27 Jun 2006
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Handle: RePEc:imf:imfwpa:06/153

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Keywords: Euro ; dollar ; international currency ; network externalities ; reserves ; currency composition ; Euro ; U.S. Dollar ; Foreign exchange reserves ; International bond markets ;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philip Lane & Jay C. Shambaugh, 2007. "Financial Exchange Rates and International Currency Exposures," NBER Working Papers 13433, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!]
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