Monday :: Dec 6, 2004

The Euro v. Dollar Battle

by rayman

One of the things that those of us living in the U-S-of-AY have long taken for granted is that the dollar will always remain the world's reserve currency. I mean, who else is going to challenge us, the Yurpeuns? Er, yes. At least, that was my impression after reading two articles, one in the Economist and one in the Financial Times. Here's the Economist's take:

The dollar's share of global foreign-exchange reserves has already fallen from 80% in the mid-1970s to around 65% today. And yet does the dollar really risk losing its status as the world's main currency? The same question was asked in the early 1990s after the dollar's previous long slide, but the dollar's pre-eminence survived. Then, however, there was no alternative to the dollar. Today the euro exists, and could yet emerge as a rival to the greenback.

The requirements of a reserve currency are a large economy, open and deep financial markets, low inflation and confidence in the value of the currency. At current exchange rates the euro area's economy is not that much smaller than America's; the euro area is also the world's biggest exporter; and since the creation of the single currency, European financial markets have become deeper and more liquid. It is true that the euro area has had slower real GDP growth than America. But in dollar terms the euro area's economic weight has actually grown relative to America's over the past five years.

The FT article isn't exactly reassuring either:
Oil exporters have sharply reduced their exposure to the US dollar over the past three years, according to data from the Bank for International Settlements.

Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent in the third quarter of 2001 to 61.5 per cent.

Middle Eastern central banks have reportedly switched reserves from dollars to euros and sterling to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone.

Private Middle East investors are believed to be worried about the prospect of US-held assets being frozen as part of the war on terror, leading to accelerated dollar-selling after the re-election of President George W. Bush.

I'm not exactly a trained economist, so if anyone wants to dispute the assertions in these two articles, I'd be glad to hear it. Oh, and economic advice for cash-strapped law students, while you're at it.

rayman :: 5:39 PM :: Comments (10) :: Digg It!