Will the Euro Overtake the Dollar as World's Reserve Currency?

The weakness of the US dollar is becoming a big problem:

1) Inflation in Saudi Arabia has hit 27 year highs

2) There have been riots in the U.A.E partly due to the weakening dollar eating into remittances

3) Companies in Europe are beginning to report currency related losses (EADS reports a loss for 2007)

If the US dollar continues to weaken, could it quickly lose its status as the world’s dominant reserve currency?

According to Wolfgang Munchau of the Financial Times, a study conducted by professors at the University of Wisconsin and Harvard University argues that the Euro could overtake the dollar as the dominant reserve currency in the next 10 to 15 years. They feel that the persistent current account deficits combined with a long term decline in the US dollar and the emergence of a genuine alternative to the dollar (the euro) would suppress the international role of the US dollar.

Munchau takes it one step further by arguing that the euro could become the dominant reserve currency even sooner because of the reckless monetary policy of the Federal Reserve, the reluctance of developing countries to maintain a dollar peg in the face of skyrocketing inflation and the increasing relative strength of the European financial system.

The US dollar has not always been the dominant reserve currency because up until the second world war, that title belonged to the British pound. Although I do not agree that the Euro will steal that title from the dollar within the next 10 years, I do believe that the amount of reserves held in Euros will come close to matching the amount of reserves held in US dollars.

Comments

[goatfarmer:]

So, will the dollar lose its status as the world’s dominant reserve currency? You have posed the question, cited some opinion, but not given your own conclusion. What do you think miss Lien? (nice teeth)

2008 Mar 25 08:49 AM

[Bhakta:]

I believe it will lose its status due to reckless government spending and constant mammoth trade deficits.

2008 Mar 25 09:07 AM

[the final h...:]

the euro is founded on sand. we might as well go to the zimbabwe dollar. at least everyone would feel rich as they marched to oblivion.

2008 Mar 25 09:27 AM

[User 142738:]

France, one of the largest EU-member economies using the euro, has a debt-to-GDP ratio not seen in the U.S. since WWII. Not too many other countries are in better shape. Using the euro would be out of spite, not economics.

2008 Mar 25 11:21 AM

[leris:]

USD will never lose its status as the world’s dominant reserve currency. simple as that. will never happen. naive assumption even thinking about that. americans know what they do. help increase US exports to developing countries such as China etc etc. destroy chinese USD reserves etc etc. simple as that.

2008 Mar 25 03:24 PM

[Jason Mark:]

What economic advantage does the dollar as the world's dominate reserve currency give to the United States? Other countries (mainly opec countries and rapidly growing countries like China and India) began holding dollars after WWII because the economies of Europe were crushed by the war. The dollar was the most stable currency and was appreciating. Lets face it, if it wasn't for US investment into Europe and Japan after WWII then those economies would have taken much longer to recover save mabe GB and France. If the dollar contiinues to lose value at an alarming rate then things will change, but lets remember that the GB Pound had been more valuable than the dollar for some time but you haven't seen a shift to that currency. I believe its more a political move than any to switch to the euro. America's role as a source of investment in the middle east is going to change drastically in the next 10 years. Mabe not in terms of $ but in terms of how and what will be invested in.

2008 Mar 25 06:25 PM

[Nick Gogerty:]

that debt to GDP comment earlier didn't include medicaid and Social security liabilities 15 years out. Current indications would call for a portfolio of currencies as a logical choice.

2008 Mar 25 06:48 PM

[billyrig:]

Eh Hello.
Have any off you people been paying attention to what is going on in the complex money markets now. The economies of the entire world are undergoing a complete readjustment. Political and Monetary systems are in confusion.
This has never been experienced in history. A re-alignment both financialy and politically is underway and where the dominoes drop is anybodies guess. One thing is for sure. (in the short term politics will take precedent) Oh Help.

2008 Nov 13 10:44 PM