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
- Introduction
- Chapter 1. The Dollar As The Leading Global Currency
- 1.1 International Role of the United States Dollar
- 1.2 Definition of the International Currency
- 1.3 History of the Dollar Hegemony
- 1.3.1 Monetary Hegemony of the United States under Bretton Woods system between 1945-1971
- 1.3.2 A New Period of the US Dollar Supremacy
- 1.4 Dollar’s Challenge to Keep Its Dominance Despite Its Rivals
- 1.4.1 Is the Petrodollar to Blame for the Fell of the Soviet Empire?
- 1.4.2 The Lagest Competitor Ever: US Dollar and Euro
- 1.5 How will be the Fate of the Dollar? Experts’ scenarios.
- Chapter 2. Euro’s Position in the International Monetary System
- 2.1. International Role of the Euro
- 2.1.1 The Role of the Euro in Trade-Invoicing
- 2.1.2 The Euro as an Anchor Currency
- 2.1.3 The Euro as the International Reserve Currency
- 2.1.4 The Euro as a Medium of Exchange
- 2.2 The Role of the Euro in the International Financial Transactions
- 2.2.1The International Debt Securi
- 2.2.2 The Euro in International Loan and Deposit Markets
- 2.3 Synthesis: Putting All Things Together
- 2.1. International Role of the Euro
- Chapter 3 Internationalization of the Euro, Problems, and Solutions, Possible Policy Arrangements
- 3.1 Internationalization of the Euro
- 3.2 The Main Advantages and Disadvantages Gained by the Increased Internationalization of the Euro
- 3.2.1 Seigniorage Benefits
- 3.2.2 Exorbitant Privilege
- 3.2.3 Terms of Trade
- 3.2.4 The Benefits Derived from the Usage of Home Currency in Trade-Invoicing
- 3.2.5 Concluded Remark for Advantages of Having an International Currency
- 3.2.6 Disadvantages Associated with the Euro’s International Position
- 3.3 Factors that Determine the Dominance of the Internationanl Currency
- 3.3.1 Government Policy Preferences and Decisions vs. Private Sector Priorities
- 3.3.2 Confidence in the Currency’s Stability
- 3.3.3 Financial Markets’ Size, Depth, and Legal Infrucstructure
- 3.3.4 Network Externalities and Strength of Incumbency
- 3.3.5 Size of Issuer Country’s Economy and Its Currency Area
- 3.4 The Possibility that the Euro Increases Its International Status
- 3.4.1 Capital Markets Union
- 3.4.2 Market Fragmentation
- 3.4.3 Creation of Ready-to-Use, Safe Asset
- Conclusions
- References
Objective & Key Themes
This thesis comprehensively assesses the positions of major international currencies in the dominant currency rivalry, with a particular focus on the euro's competition with the US dollar to capture a greater share of the international market. It examines historical contexts, current realities, and strategic implications of the international monetary system.
- Analysis of the US dollar's role as the leading global currency and its historical hegemony.
- Investigation into the euro's current position and international significance within the monetary system.
- Comparison of the euro and dollar across various metrics like trade invoicing, reserve currency status, and financial transactions.
- Identification and discussion of factors influencing the dominance and internationalization of a currency.
- Exploration of the advantages and disadvantages of increased internationalization for the euro.
- Proposals for policy arrangements and solutions to enhance the euro's international status.
Excerpt from the Book
Position of the United States Dollar in the Global Monetary System
The dollar was printed first time in 1914 with the foundation of the Federal Reserve Bank and became the global reserve currency in about the 1940s. The Federal Reserve Bank established in response to the inaccuracy and volatility of a currency system based on individual banknotes with the Federal Reserve Act of 1913. At that time, the American economy had overtaken Britain as the world’s biggest economy. However, Britain remained the global economic base, with bulk transactions taking place in British pounds.
The dollar’s global significance was established during the Bretton Woods period, is still in place, although with some deterioration. Other convertible moneys, like the pound sterling, the German mark, and the Japanese yen, have struggled to challenge its dominance seriously. Due to well-established transaction processes and international payment systems, it has retained its position in international trade to this day. Its hegemony over the world’s foreign exchange reserves has certain drawbacks for countries with large reserves. It was discovered that during a crisis, the probability of dollar value volatility rises, putting the value of reserves in jeopardy (their purchasing power). Despite these dangers, maintaining international liquidity is still reliant on available dollar quantities. Following the fall of the Bretton Woods regime, the world’s economy experienced banking and currency crises, as well as uncertainty in capital flows, forcing developed and transitional countries to raise their foreign exchange reserves. Higher foreign exchange reserves were thought to ensure that a country could more easily deal with the difficulties that any disruptions in capital inflows might bring. Central banks have a propensity to formulate their foreign reserve portfolios mainly with US Treasury bills, which are liquid and stable assets. Even though the euro has also become an important reserve currency, this is still the case. The global crisis(GFC) of 2008 sparked tensions about the need to overhaul the international monetary system (IMS), given the failure of depending on the dollar as the leader reserve currency. The possibility of dollar depreciation has emerged as a major issue for the countries that own huge foreign reserves, such as China.
Furthermore, the global demand for dollar securities is related to the US budget and current account deficits, putting the country’s external solvency in jeopardy. This is one of the causes why new IMS solutions, such as the choice of many currencies sharing the position of world reserve currency, are still being pursued. According to the related literature, the world’s reserve currency position may be shared soon by three national moneys: the dollar, the euro, and the renminbi.
Summary of Chapters
Chapter 1. The Dollar As The Leading Global Currency: This chapter delves into the historical evolution of the US dollar's dominance, its establishment as the primary global reserve currency, and the various challenges it has faced from rival currencies and economic shifts.
Chapter 2. Euro’s Position in the International Monetary System: This section meticulously examines the international role of the euro across metrics like trade invoicing, anchor currency status, and financial transactions, comparing its performance to the dollar and other global currencies, and discussing its limitations.
Chapter 3 Internationalization of the Euro, Problems, and Solutions, Possible Policy Arrangements: This chapter analyzes the benefits and costs associated with increasing the euro's international status, identifies key factors influencing currency dominance, and outlines potential policy interventions and structural reforms to strengthen the euro's global position.
Keywords
International currency, US dollar, Euro, currency hegemony, reserve currency, international monetary system, trade invoicing, financial transactions, capital markets, seigniorage, exorbitant privilege, currency competition, global economy, monetary policy, safe asset
Frequently Asked Questions
What is this work fundamentally about?
This work fundamentally examines the competition between major international currencies, particularly the US dollar and the euro, and analyzes the factors that determine their global standing within the international monetary system.
What are the central thematic areas?
The central thematic areas include the historical and current roles of the dollar and euro, their respective positions in international trade and finance, the advantages and disadvantages of holding reserve currency status, and potential strategies for the euro's internationalization.
What is the primary goal or research question?
The primary goal is to assess the international positions of the dollar and euro in their rivalry for market dominance, investigating the euro's competitive efforts against the dollar to expand its global reach.
Which scientific method is used?
The thesis employs an analytical approach based on economic data and academic resources, using statistical information from institutions like the IMF, ECB, and BIS to measure currency internationalization and compare key features.
What is covered in the main part?
The main part covers the historical development of the dollar's hegemony, the euro's current international status across various functions (trade invoicing, anchor currency, reserve currency), and a detailed discussion of problems, solutions, and policy arrangements for the euro's further internationalization.
What keywords characterize the work?
Key terms characterizing the work include International currency, US dollar, Euro, currency hegemony, reserve currency, international monetary system, trade invoicing, financial transactions, capital markets, seigniorage, exorbitant privilege, currency competition, global economy, monetary policy, and safe asset.
What are the main reasons for the euro's struggles to achieve global dominance?
The euro's struggles are attributed to several factors, including the absence of a continental financial center comparable to New York or London, an underdeveloped technology sector, the scarcity of a common European safe asset, and a perceived lack of military power to back its economic influence.
What policy arrangements are proposed to boost the euro's international status?
Proposed policy arrangements include the completion of the Banking Union and Capital Markets Union, creation of a ready-to-use European safe asset backed by the European budget, and a more welcoming stance by the European Central Bank towards the euro's use in non-Eurozone states.
How does the dollar's "exorbitant privilege" manifest?
The dollar's "exorbitant privilege" manifests as a benefit gained by the US, where other central banks' demand for its bonds leads to decreased yields, and private firms worldwide demand US private bonds, effectively lowering borrowing costs for the US.
What role does military strength play in currency dominance?
The thesis suggests that military superpower status is a significant quality that the dollar's competitors lack, reinforcing the idea that powerful security alliances and geopolitical influence play a crucial role in producing "safe assets" and obliging financial transactions, thereby underpinning currency dominance.
- Quote paper
- Sevinc Zeynalova (Author), 2021, The Dollar and the Euro as International Currencies, Munich, GRIN Verlag, https://www.grin.com/document/1675615
