The thesis discusses the roles of the major international currencies in the global field. Especially, it focuses on the currency competition of the euro and the dollar. The dollar has kept its dominance for several decades and will probably remain the hegemon international currency in the nearest future.
In its twenty years of existence, the euro has not yet proved itself as a worldwide currency. This fact is investigated using a variety of metrics, including its position as an anchor or reference in exchange rate adjustments, as trade-invoicing currency, as an international reserve currency, and for its role in financial transactions. Since 1999, the euro has always been in a much smaller position than the dollar for any of these metrics. The thesis investigates and critically discusses the causes of this lack of performance.
Table of Contents
1. Introduction
2. Chapter 1. The Dollar As The Leading Global Currency
2.1 International Role of the United States Dollar
2.2 Definition of the International Currency
2.3 History of the Dollar Hegemony
2.3.1 Monetary Hegemony of the United States under Bretton Woods system between 1945-1971
2.3.2 A New Period of the US Dollar Supremacy
2.4 Dollar’s Challenge to Keep Its Dominance Despite Its Rivals
2.4.1 Is the Petrodollar to Blame for the Fell of the Soviet Empire?
2.4.2 The Lagest Competitor Ever: US Dollar and Euro
2.5 How will be the Fate of the Dollar? Experts’ scenarios.
3. Chapter 2. Euro’s Position in the International Monetary System
3.1. International Role of the Euro
3.1.1 The Role of the Euro in Trade-Invoicing
3.1.2 The Euro as an Anchor Currency
3.1.3 The Euro as the International Reserve Currency
3.1.4 The Euro as a Medium of Exchange
3.2 The Role of the Euro in the International Financial Transactions
3.2.1The International Debt Securi
3.2.2 The Euro in International Loan and Deposit Markets
3.3 Synthesis: Putting All Things Together
4. Chapter 3 Internationalization of the Euro, Problems, and Solutions, Possible Policy Arrangements
4.1 Internationalization of the Euro
4.2 The Main Advantages and Disadvantages Gained by the Increased Internationalization of the Euro
4.2.1 Seigniorage Benefits
4.2.2 Exorbitant Privilege
4.2.3 Terms of Trade
4.2.4 The Benefits Derived from the Usage of Home Currency in Trade-Invoicing
4.2.5 Concluded Remark for Advantages of Having an International Currency
4.2.6 Disadvantages Associated with the Euro’s International Position
4.3 Factors that Determine the Dominance of the Internationanl Currency
4.3.1 Government Policy Preferences and Decisions vs. Private Sector Priorities
4.3.2 Confidence in the Currency’s Stability
4.3.3 Financial Markets’ Size, Depth, and Legal Infrucstructure
4.3.4 Network Externalities and Strength of Incumbency
4.3.5 Size of Issuer Country’s Economy and Its Currency Area
4.4 The Possibility that the Euro Increases Its International Status
4.4.1 Capital Markets Union
4.4.2 Market Fragmentation
4.4.3 Creation of Ready-to-Use, Safe Asset
Research Objectives and Themes
This thesis investigates the competitive dynamics between the US dollar and the euro within the international monetary system. It aims to assess why the dollar maintains its long-standing global hegemony while identifying the structural, economic, and political factors that limit the euro's internationalization and potential to surpass the dollar.
- Historical evolution of dollar hegemony and the impact of the Bretton Woods system.
- Comparative analysis of the euro and the dollar across key metrics: reserve status, trade invoicing, and financial transactions.
- Evaluation of the advantages and disadvantages of currency internationalization.
- Analysis of structural barriers such as market fragmentation and the lack of safe European assets.
- Discussion of policy reforms required for the euro to gain a stronger international foothold.
Excerpt from the Book
1.4.1 Is the Petrodollar to Blame for the Fell of the Soviet Empire?
After the fact that the Soviet Union attended the Bretton Woods Conference, but ultimately chose to leave because the US government altered its policy after Roosevelt’s death. Truman saw the Soviet Union as a hostile hazard to the United States rather than a potential ally.
The US and USSR became rivals not only in defense and armed matters but also in economic and monetary matters during the Cold War. The USSR began a rivalry with the US to win over several neutral states by providing better assistance to countries like Egypt, Syria, India, and even Chile and Argentina. The USSR’s decision to offer debt in rubles and to open its marketplace to these states’ goods limited the dollar’s attractiveness.33
Sadly, the Soviet Union had an Achilles’ heel in the form of food shortage. The Soviet Union was able to establish a solid industrial structure thanks to its economic policy. However, this policy severely harmed the country’s agriculture, making it heavily reliant on food imports. Kennedy wrote, “…a century ago Russia was one of the two largest grain exporters in the world. Yet since the early 1970s, it has needed to import tens of millions of tons of wheat and corn each year, [It] needs to pour out further billions of hard currency to import grain….”34
Summary of Chapters
Chapter 1. The Dollar As The Leading Global Currency: Examines the historical emergence and maintenance of the US dollar's global hegemony, tracing its roots from the Bretton Woods system to modern geopolitical and economic strategies.
Chapter 2. Euro’s Position in the International Monetary System: Provides a quantitative analysis of the euro's performance against the dollar across various roles, including trade invoicing, reserve currency status, and financial transaction usage.
Chapter 3 Internationalization of the Euro, Problems, and Solutions, Possible Policy Arrangements: Explores the economic benefits and costs of an international currency and identifies the specific structural obstacles, such as financial market fragmentation and the absence of safe assets, hindering the euro.
Keywords
US Dollar, Euro, International Monetary System, Dollar Hegemony, Currency Competition, Foreign Exchange Reserves, Trade-Invoicing, Bretton Woods, Financial Markets, Capital Markets Union, Seigniorage, Petrodollar, Monetary Policy, Safe Assets, Market Fragmentation.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis focuses on the ongoing competition between the US dollar and the euro, analyzing the dollar's enduring global dominance and the factors preventing the euro from becoming a primary international currency.
Which specific areas of the international monetary system are analyzed?
The study examines currency usage in global reserve portfolios, international debt securities, foreign exchange markets, and trade-invoicing mechanisms.
What is the primary research question regarding the dollar's future?
The research seeks to determine whether the dollar's hegemony is sustainable and to what extent external factors or rival currencies might threaten its leading position in the global economy.
Which scientific methodology is applied in this research?
The thesis utilizes a mix of historical analysis, comparative economic performance metrics, and a review of theoretical frameworks established by economists like Benjamin J. Cohen and Paul Krugman.
What does the main body of the work cover?
The main body covers the history of dollar hegemony, the empirical measurement of the euro's international performance, and a critical discussion of the structural limitations—such as market fragmentation and the lack of a "safe asset"—facing the euro.
Which keywords best describe this study?
Key terms include dollar hegemony, international monetary system, currency competition, trade-invoicing, and financial market integration.
How did the Cold War influence dollar dominance?
The thesis highlights how the dollar's role as a reserve and trade currency, combined with geopolitical influence and the petrodollar system, significantly impacted the economic stability of rivals, including the Soviet Union.
What role does the "safe asset" play in the competition?
The thesis argues that the lack of a unified, "safe" European asset is a major deterrent for foreign investors, who continue to prefer US Treasury bonds for their perceived security and liquidity.
- Quote paper
- Sevinc Zeynalova (Author), 2021, The Dollar and the Euro as International Currencies, Munich, GRIN Verlag, https://www.grin.com/document/1675615
