The Euro and the Dollar

81 Pages Posted: 13 Dec 2005

See all articles by Robert N. McCauley

Robert N. McCauley

University of Oxford - Oxford Centre for Global History; Boston University, Global Development Policy Center

Date Written: November 1997

Abstract

How will the arrival of the euro affect the dollar? This paper uses portfolio theory to analyse the likelihood and impact of shifts between the dollar and the euro by private asset managers, official reserve managers and global liability managers. It examines the effects on both the level of the dollar and its volatility in three periods: the period before the euro's introduction; the interval until the European Central Bank consolidates its credibility; and the approach to the steady state. While the heavy weight of the Deutsche mark in international holdings of European assets today may suggest a risk intolerance that could lead to shifts into the dollar in the near future, that weight may evidence nothing more than the mark's transactions role. After its introduction, the euro may benefit from shifts by central banks into Treasury bills issued by European governments. In the approach to the steady state, the greater depth, breadth and liquidity of the euro financial markets will attract international investment. But these features should be expected to attract increased international borrowing as well, so there is little reason to expect the dollar to fall against the euro as a result of a net portfolio shifts. There is some reason to expect that in the long run the euro will impart greater volatility to the dollar's exchange rate against all US trading partners.

Suggested Citation

McCauley, Robert N. and McCauley, Robert N., The Euro and the Dollar (November 1997). BIS Working Paper No. 50, Available at SSRN: https://ssrn.com/abstract=857065 or http://dx.doi.org/10.2139/ssrn.857065

Robert N. McCauley (Contact Author)

Boston University, Global Development Policy Center ( email )

67 Bay State Road
Boston, MA 02215
United States

University of Oxford - Oxford Centre for Global History ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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