Euro or Dollar?

The currency of the future


Term Paper, 2011
7 Pages, Grade: B

Excerpt

The U.S. dollar wasn’t always the leading currency. In 1899, the pound was the leader with a share in known foreign exchange holdings of official institutions that was more than twice the total of the franc and the marc, and much greater than the dollar. Even during the World War II, in 1940, the level of foreign-owned liquid sterling assets was still double the level of foreignowned liquid dollar assets (Chinn & Frankel, 2008). However, after the war the situation changed, mostly because US was lending and UK was borrowing the money.

After World War II the dollar became the leader among other international currencies. Moreover, the Bretton Woods agreement formed a monetary system with fixed exchange rates, managed by newly created international institutions like International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). Those institutions were using the U.S. dollar as a reserve currency. The main characteristic of the Bretton Woods system was an obligation for each country to tide the exchange rates to the U.S. dollar, because the dollar was a gold standard currency for central banks (Galati & Wooldridge, 2009). Even after the year 1971, when US had to demise the Bretton Woods system, US dollar managed to retain its dominance in the international monetary system thanks to three main factors (Cheol S., 2009):

- U.S. economy,
- U.S. political and military power,
- The credibility of the US Federal Reserve.

In January 1999, eleven members of the European Union decided to cede their monetary sovereignty and introduce the euro as their common currency. Till the year 2011 the euro currency was adopted by additional six countries and now it is used by 17 out of 27 EU members. As the Table 1 shows, the number of people using the euro currency (Euro Zone) is already bigger than the number of people using the dollar (US). GDP is still higher in the US, than in Euro Zone (13,807.5 compared to 12, 196.4 billion US). However, world trade share is already bigger in Euro Zone by 3.1 per cent , compared to the United States. Euro Zone has also higher level of international bonds outstanding and lower inflation (2.1 per cent compared to 2.7 per cent in U.S.). On the other hand, the dollar is supported by the world currency reserves, which accounts for almost 64 per cent in United States and only 26.5 per cent in the Euro Zone. Moreover, the stock market capitalization is significantly higher in the U.S. with almost 20,000 US$ billion.

As can be seen in the table below, the dollar is still a very important currency but the euro is right behind it and might overtake the dollar in the future. Professor Robert Mundell, regarded in some circles as the intellectual father of the euro, has predicted that the euro will eventually and inevitably compete against the US dollar as the global key currency (Cheol S., 2009).

Table 1 Macroeconomic Profiles of Major Financial Powers*

Abbildung in dieser Leseprobe nicht enthalten

* The inflation rate is the annual average from 1999 to 2007. The remaining data are 2007 figures. The international bonds outstanding refers to international bonds and notes outstanding as of December 2007 by currency of issue.

Source: Datastream, International Financial Statistics, World Federation of Exchanges, IMF 2008 Annual (Cheol S., 2009)

In the following graphs I will focus on the analysis of separate economic factors such as level of the GDP, inflation, market capitalization and stock turnover in the recent years, both in the United States and in the Euro Area (Zone). This will allow me to see the long-term trends to support my final opinion about the currency of the future.

Graph 1 GDP (Current US$)

Abbildung in dieser Leseprobe nicht enthalten

Source: World Bank national accounts data, and OECD National Accounts data files (The World Bank, 2011)

[...]

Excerpt out of 7 pages

Details

Title
Euro or Dollar?
Subtitle
The currency of the future
College
Warsaw University  (Faculty of Management)
Course
Regional Economic Integration
Grade
B
Author
Year
2011
Pages
7
Catalog Number
V180218
ISBN (eBook)
9783656029687
ISBN (Book)
9783656029984
File size
512 KB
Language
English
Tags
euro, dollar, USD, EUR, currency, currencies, USA, Eurozone, European Union, EU, GDP, macroeconomics, Europe
Quote paper
Tomasz Wilczak (Author), 2011, Euro or Dollar? , Munich, GRIN Verlag, https://www.grin.com/document/180218

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