The Euro's Challenge to the Dollar: Different Views from Economists and Evidence from Cofer (Currency Composition of Foreign Exchange Reserves) and Other Data

40 Pages Posted: 26 Jul 2006

See all articles by Ewe-Ghee Lim

Ewe-Ghee Lim

International Monetary Fund (IMF)

Date Written: June 2006

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.

Keywords: Euro, dollar, international currency, network externalities, reserves, currency composition

JEL Classification: F31, F39

Suggested Citation

Lim, Ewe-Ghee, The Euro's Challenge to the Dollar: Different Views from Economists and Evidence from Cofer (Currency Composition of Foreign Exchange Reserves) and Other Data (June 2006). Available at SSRN: https://ssrn.com/abstract=920245 or http://dx.doi.org/10.2139/ssrn.920245

Ewe-Ghee Lim (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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