The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?

Gabriele Galati and Philip Wooldridge

No 218, BIS Working Papers from Bank for International Settlements

Abstract: Well developed financial markets are a necessary condition for a currency to play a role as a reserve currency. The introduction of the euro greatly improved the functioning of euro financial markets. This paper investigates whether euro financial markets have developed sufficiently to facilitate the emergence of the euro as a reserve currency on par with the US dollar. We find that the liquidity and breadth of euro financial markets are fast approaching those of dollar markets, and as a result the euro is eroding some of the advantages that have historically supported the pre-eminence of the US dollar as a reserve currency. This strengthens the incentive for monetary authorities to reconsider the currency composition of their reserves. Nevertheless, the introduction of the euro has not yet resulted in a significant change in the currency composition of official reserve holdings. The US dollar has maintained its place as the dominant reserve currency, supported perhaps by the edge that dollar financial markets still have over euro markets in terms of size, credit quality and liquidity, as well as inertia in the use of international currencies.

Keywords: international currency; foreign exchange reserves; currency composition; dollar; euro; financial markets (search for similar items in EconPapers)
JEL-codes: E58 F30 F31 G11 G15 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-10
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Journal Article: The euro as a reserve currency: a challenge to the pre-eminence of the US dollar? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:218

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