Different aspects of challenges that U.S. dollar faces today


The history has seen alterations, rises and falls of an international modesty currency, emerging with an increased function of sterling in the nineteenth century and replaced by U.S. dollar in the twentieth century ( Eichengreen, 2006 ; Flandreau and Jobst, 2006 ) . The outgrowth of euro has influenced a batch the whole universe in many facets and it is non a uncertainty that its debut improved the operation of euro fiscal markets, particularly if we look from the position of dealing costs and state specific economic hazards ( Freix, 2004 ) . It is the fact that euro is quickly nearing U.S. dollar in footings of liquidness and comprehensiveness of euro fiscal markets. But at this flat U.S. dollar is still keeping its prima function on the international fiscal markets, possibly because of its greater fiscal market size or the inactiveness in the usage of fiscal resources.

The aim of this paper is to analyse different facets of challenges U.S. dollar faces today. What are the opportunities for euro to excel U.S. dollar and to go the prima currency.

The first subdivision of the paper gives a brief history about an international currency development, the 2nd and the basic portion gives some theoretical facets and reviews the thoughts of different economic experts about the challenges dollar face. All these treatment leads to the concluding portion – decision.


Before the few decennaries of World War I, international gold criterion emerged. It was gilded bullion and non a gold coin criterion, which was the nineteenth century invention. It meant coin and paper money exchangeable into gilded bullions. Britain was the universe ‘s leading trade state doing up 30 % of the universe ‘s export in 1860 ; 20 % in 1890 and the 60 % of the universe ‘s trade invoiced and settled in sterling between the old ages 1860 and 1914, as it was appropriate for a batch of foreign providers for come ining the British market. The distinction of sterling until 1914 can be considered as the grounds of bing merely one international currency at any point in clip. It was sterling, replaced by dollar and we should think what will be the following.

In 1914, the Federal Reserve System was established, which increased the attraction of the New York market as a fiscal centre. During the post-World War II period, while Europe suffered with the effects of the war and the states with possible alternate currencies to the dollars, maintained a great capital controls. This explains the laterality of dollar in militias during a long period after World War II and in add-on, the rapid growing of US economic system played a important function in set uping dollar as an international currency ( Eichengreen, 2005 ) .

In 1944 major market economic experts gathered in Bretton Woods to discourse the post-war pecuniary system. Keynes developed the thought about advantages of making an international currency-Bancor, but there was no political will from states to give up their national currencies. At the period, U.S. was the strongest economic system and the Breton Woods run intoing agreed on making International Monetary Fund that would be anchored to the dollar – the lone international currency exchangeable into gold by cardinal Bankss ( Swaminathan S. Anklesaria Aiyar, 2009 ) .

The balance of payment excess with U.S. was the lone manner for other states to gain dollars. In 1958, United States started to confront big balance of payment shortages that was a consequence of Europeans trade excesss. As an overall consequence, in 1971 U.S. closed the official gold window therefore completing the Bretton Woods government. ( Menzie Chinn, Jeffrey Frankel, 2005 ) All these facts had an influence on the development of U.S. dollar as an international currency.

Nowadays Euro, the currency which physically occurred in 2002 and is used by 12 European states, may be seen as a future international currency, replacing U.S. dollar.


In general, Money is defined in footings of three maps in domestic degree: medium of exchange, unit of history, and shop of value. In an unfastened economic system, where both existent and pecuniary sectors of economic sciences are interrelated on the international degree, the unit of history should besides be able to carry through these three maps on an international degree. While we speak about an international currency, official and private sectors should be distinguished. The following tabular array summarizes the three maps of money:


Private Use

Official Use

Medium of Exchange

Vehicle Currency in Foreign Exchange Market

Foreign exchange intercession

Shop of Value


Reserve Accumulation

Unit of measurement of Account


( For Trade or Financial Transactions )

Monetary Anchor

Beginning: Discrepancy of tabular array in Cohen ( 1971 ) .

In add-on to the maps, four determiners act upon the outgrowth of the modesty currency ( Beginning: Ewe-Ghee Lim, 2006 ) :

First, state ‘s portion in universe end product and trade – It is more likely for other states to utilize the currency of a state with a larger portion as a pecuniary ground tackle ( Eichengreen, 1998 ; Frenkel and Sondergaard, 1999 ; Frankel, 2000 ) . Second, macroeconomic stableness – Here we should advert that monetary value stableness is of a great importance in order to keep the international function of currency ( Hartmann and Issing, 2002 ) . Third, fiscal market development – It is more likely to utilize those states ‘ currency for intercession intents that are distinguished with their fiscal markets in footings of larger size and liquidness ( Eichengreen, 1998 ) . And the last but non least, web outwardnesss -The more states use a currency as a medium of exchange, the lower will be minutess costs and higher its liquidness, which makes it attractive for new users ( Gaspar, 2004 ) .

Empirical surveies showed the really importance of those factors. The being of these factors led the U.S. dollar to go the dominant currency. But at the same clip, the factors of international currency position tend to alter easy bring oning inactiveness ( Cohen, 2000 ) . The economic experts agree about the influences of the above mentioned factors, though there exist different positions about the importance of each. Harmonizing to Bergsten ( 1997 ) , EU accounted for 31 % of universe end product and 20 % of universe trade ( excepting intra EU minutess ) . It is true that euro is more liquid than its predecessor currencies, but if its liquidness is more compared to U.S. dollar it is arguable ( Galati and Tsatsaronis, 2003 ) . The dollar ‘s portion on the international market decreased from 94 % in 1998 to 89 % in 2004. Dollar/Euro was the best traded currency brace in 2004 busying 28 % of planetary turnover, compared with U.S. holding 27 % of universe end product and 18 % of the universe trade. At the same clip Bergsten/Mundell see euro ‘s function as a stable shop of value. Mundell stated: “ variegation effects are inevitable ” and “ the fact that the majority of international militias are held in dollars makes that currency a sitting duck in a fiscal crisis ” .

McKinnon ( 1998 ) believes euro may go the universe ‘s most of import regional currency. His thoughts are based on the premises of big economic size, which is the chief factor to propose a function for euro beyond its political boundary lines, though the economic expert believes it will non be able to replace U.S. dollar. Merely events like monolithic rising prices in the United States, doing destabilization of dollar ‘s value in footings of goods and services, may take to displacing the currency from its prima place. Mckinnon besides speaks approximately dollar as a vehicle currency. It accounts about 90 % of interbank minutess outside Europe and represents the chief bill currency for primary trade goods such as oil, Cu and wheat, every bit good as the development and smaller industrialised states use dollar as their exports ‘ chief bill currency. Dollar is the chief intercession currency and antecedently discussed factors ( vehicle and bill currencies ) besides facilitate this function, as it is cheaper and more efficient to step in with this currency. For the modesty currency, authoritiess use the 1 they can utilize in intercession. Hence dollar occurs to be the major modesty currency every bit good. McKennon emphasizes the function of dollar as a nominal ground tackle in two ways: First, as a restriction to the exchange rate fluctuation, and secondly, to avoid inauspicious balance sheet effects in different states. If we look to the international dollar debitors, they tend to nail down to the dollar in normal times. On the other manus, there are international dollar creditors – states as China and Japan that find it hard to impart abroad in their domestic currencies. They are concerned because in instance of domestic currency important grasp against the dollar, their fiscal establishments may confront bankruptcy.

Kenen ( 2002, 2003 ) emphasizes the importance of dollar ‘s function as an exchange vehicle in 3rd currency markets. For illustration: Alternatively of altering one currency to another ( bilateral exchange ) , it is possible to change over these two currencies utilizing dollar as a vehicle. Therefore, it is hard to dispute dollar in these footings.

Cooper ( 1997 ) focuses on the importance of the liquid and well-developed U.S. fiscal markets. If in footings of size, the US Treasury and EMU do non differ, there is still one really of import difference: The U.S. market is homogeneous, while EMU market is heterogenous: Debts are denominated in euros, but have different recognition quality and liquidness hazard premia, because they are issued by the different authoritiess. Based on this account, Cooper states that: “ major supplanting of the dollar will non take topographic point, at least several decennaries. ” In contrast to the above mentioned statements of different economic experts, Eichengreen ( 2005 ) argues that “ market liquidness is non all that affairs. ” He takes into consideration the U.S. current history shortage and explains that if U.S foreign debt grows comparatively towards its GDP, the aliens will lose the trust of the currency, and it will take to the depreciation and inflationary force per unit areas which make dollar less attractive. Eichengreen besides states that dollar will confront a classical trust job and single involvements will take over corporate 1s.


Based on the treatment and thought developments given supra, we may reason the followers: The challenge of the dollar in the hereafter may be caused by two chief factors: First, The structural alteration and farther development of EMU – whether it becomes larger than the U.S. economic system by fall ining the other 13EU members, particularly UK, with its of import fiscal market. And, the 2nd – if U.S. dollar faces farther devaluation.

In instance of EMU alterations and the lost assurance toward dollar, euro may go an attractive currency for a batch of investors. At the same clip jobs with dollar depreciation will do a loose of taking place for U.S. dollar and give the chances to other currencies, like euro to go an beforehand international currency.


Ewe-Ghee Lim, ‘The Euro ‘s Challenge to the Dollar: Different Positions from Economists ‘ , IMF Working Paper, WP/06/153, June 2006 ;

Gabriele Galati and Philip Woodridge, ‘The euro as a modesty currency: a challenge to the pre-eminence of the US dollar? ‘ BIS Working Paper, No. 218, Bank for International Settlements, October 2006 ;

Menzie Chinn & A ; Jeffrey Frankel, ‘Will the Euro Eventually Surpass the Dollar As Leading International Reserve Currency? , in Richard Clarida ( ed. ) , G7 Current Account Imbalances, University of Chicago Press, 2007 ;

Benjamin J. Cohen, ‘Global Currency Rivalry: Can the euro Ever Challenge the Dollar? , Global & A ; International Studies Program, Paper 8, University of California, 2003 ;

Benjamin J. Cohen, ‘Dollar Dominance, Euro Aspirations: Recipe for Discord? ‘ University of California, JSMC 2009 Volume 47 ;

Barry Eichengreen, ‘Sterling ‘s Past, Dollar ‘s Future: Historical Positions on Reserve Currency Composition ‘ , University of California, April 2005 ;

Swaminathan S. Anklesaria Aiyar, ‘An International Monetary Fund Currency to Equal the Dollar? Why Particular Drawing Rights Ca n’t Play That Role ‘ , Development Policy Analysis no. 10, July 7, 2009.