Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?
Abstract
The euro is a plausible competitor to replace the dollar as the
leading currency central banks hold, just as the dollar replaced
the pound. Factors affecting the dollar's status include size of
the home country, inflation, exchange rate variability and size
of the relevant home financial center as measured by the
turnover in its foreign exchange market. The euro's success will
depend on whether the United Kingdom and enough other European
Union members join euroland so it becomes larger than the U.S.
economy and whether U.S. macroeconomic policy undermines
confidence in the value of the dollar, in the form of inflation
and depreciation. This paper is a substantial revision of an earlier work presented at a National
Bureau of Economic Research conference on current account sustainability.