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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;

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References

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  1. Richard Portes & Helene Rey, 1998. "The Emergence of the Euro as an International Currency," NBER Working Papers 6424, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Kenneth Rogoff & Richard Clarida, . "The Unsustainable US Current Account Position Revisited," Working Paper 14901, Harvard University OpenScholar.
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  6. Menzie Chinn & Jeffrey A. Frankel, 2007. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Chapters, National Bureau of Economic Research, Inc, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 283-338 National Bureau of Economic Research, Inc.
  7. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  8. Paul R. Krugman, 1979. "Vehicle Currencies And the Structure Of International Exchange," NBER Working Papers 0333, National Bureau of Economic Research, Inc.
  9. Kenen, Peter B., 2002. "The euro versus the dollar: will there be a struggle for dominance?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 24(4), pages 347-354, July.
  10. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
  11. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
  12. Bergsten, C. Fred, 2002. "The euro versus the dollar: will there be a struggle for dominance?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 24(4), pages 307-314, July.
  13. 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.
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Citations

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Cited by:
  1. 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.
  2. Hyoung-kyu Chey, 2013. "The Concepts, Consequences, and Determinants of Currency Internationalization," GRIPS Discussion Papers, National Graduate Institute for Policy Studies 13-03, National Graduate Institute for Policy Studies.
  3. Philip R. Lane & Jay C. Shambaugh, 2007. "Financial Exchange Rates and International Currency Exposures," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp229, IIIS.
  4. Gabriele Galati & Philip D. Wooldridge, 2006. "The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?," BIS Working Papers 218, Bank for International Settlements.
  5. 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.
  6. Anna Wong, 2007. "Measurement and Inference in International Reserve Diversification," Working Paper Series, Peterson Institute for International Economics WP07-6, Peterson Institute for International Economics.
  7. Elias Papaioannou & Richard Portes, 2008. "The international role of the euro: a status report," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 317, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  8. Thammarak Moenjak & Kengjai Watjanapukka & Oramone Chantapant & Teeravit Pobsukhirun, 2010. "New Globalization: Risks and Opportunities for Thailand in the Next Decade," Working Papers, Economic Research Department, Bank of Thailand 2010-04, Economic Research Department, Bank of Thailand.
  9. Aideen Morahan & Christian B. Mulder, 2013. "Survey of Reserve Managers," IMF Working Papers 13/99, International Monetary Fund.
  10. 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, European Central Bank 0916, European Central Bank.

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