Chapter

Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?

Menzie Chinn and Jeffrey A. Frankel

in G7 Current Account Imbalances

Published by University of Chicago Press

Published in print May 2007 | ISBN: 9780226107264
Published online February 2013 | e-ISBN: 9780226107288 | DOI: http://dx.doi.org/10.7208/chicago/9780226107288.003.0009
Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?

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This chapter investigates whether the dollar might eventually follow the precedent of the pound and cede its status as leading international reserve currency. The link between currency shares and their determinants is nonlinear, but changes are felt only with a long lag. The sustainability of the U.S. current account deficit may depend on the continued willingness of foreign central banks to collect ever-greater quantities of U.S. assets. The euro soon after its debut came into wide use to denominate bonds. The euro is the number two international currency, and has rapidly gained acceptance. Euro enthusiasts endured some serious setbacks in 2005. Data indicate that dollar depreciation would be no free lunch: it could have consequences for the functioning of the international monetary system as profound as the loss of the dollar's preeminent international currency position, and along with it the exorbitant privilege of easily financing U.S. deficits.

Keywords: dollar; international reserve currency; currency shares; euro; foreign central banks; current account deficit; international monetary system

Chapter.  21389 words.  Illustrated.

Subjects: Financial Markets

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