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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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  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. [Downloadable!]
  2. Lane, Philip R. & Shambaugh, Jay C, 2007. "Financial Exchange Rates and International Currency Exposures," CEPR Discussion Papers 6473, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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