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Reserve Currency
Sterling held pole position until the second world war, but lost it because of the UK’s imperial overreach. The US economy had already overtaken that of the UK in the 1870s. One of the factors that delayed the dollar’s rise was lack of a sophisticated financial sector, which did not develop until the establishment of the Federal Reserve System in 1913. Global reserve currency status is due to many factors such as the size of the economy, the country’s share in international trade and the depth of the financial markets. Inertia is another. If yours is a global reserve currency today, it is likely to be one tomorrow too. But this works only up to a point – a tipping point.
Benefits to the US (of having the reserve currency of the world)
US has an "exorbitant privilege" – the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the US.
Will Asian Central Banks continue purchasing Dollars?
One such theory says that foreign central banks collude to hang on to dollars to protect the value of their holdings.
Euro as reserve currency?
Not yet! At present 2008 - the euro only accounts for a little over a quarter of world reserves, against the dollar’s share of two-thirds.
The eurozone economy is almost as large as that of the US and may surpass it as it continues to enlarge. London is the eurozone’s de facto financial centre, even though the UK itself has not adopted the euro. Also, the eurozone bond markets are now almost as deep and liquid as their US counterparts.
one prediction:
Figure 1. The euro and the dollar’s projected international reserve shares
Source: Chinn and Frankel (2008).
anglo-saxon vs European finance:
The credit crisis 07-09.... has been a crisis of Anglo-Saxon transaction-based capitalism. Not too long ago, it was considered to be vastly superior to the eurozone’s old-fashioned relationship finance.
In early 2008, the Euro gained ground against the supremacy of the U.S. dollar. Will it gradually supplant it as the world's reserve currency? The euro’s share as a global reserve currency is steadily increasing and there is a chance that is will overtake the dollar sooner rather than later. If the UK were to enter the European Monetary Union (EMU), many measures of EU liquidity and market size would surpass those of the U.S. Continued strengthening of the EUR/USD may accelerate the euro's ascent as a reserve currency but some believe that a new unipolar system based on the Euro is still a very remote possibility and might never materialize.
As of 2006, roughly 65 percent of reserves held by foreign central banks were in dollars and 25 percent in euros. Harvard's Jeffrey Frankel and University of Wisconsin's Menzie Chinn think the euro could surpass the dollar by 2015.
the dollar surpassed the pound in the mid-1920's, but then the greenback lost its dominant position in the 1930's because of disastrous mismanagement of the US economy, the pair wrote in an April FT column.
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“Euro as Reserve Currency”?
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