Dominant Currencies and the Future of the Euro

Michele Fratianni, Andreas Hauskrecht () and Aurelio Maccario ()

Open Economies Review, 1998, vol. 9, issue 1, 467-492

Abstract: The paper's thesis is that the US dollar, despite the inevitable erosion of market share that it will suffer at the hands of the euro, will remain the most important international currency. The transaction domain of an international currency depends on its ability to lower transaction costs relative to alternative currencies. The EMU financial markets will not be as integrated, and thus as liquid, as the US financial markets for quite some time, thus favoring the use of the dollar as a medium of exchange. Inertia and reputational considerations further favor the dollar. The future value of the exchange rate dollar-euro will depend on economic fundamentals more than on portfolio shifts. Portfolio shifts argue for an appreciation of the euro; but fundamentals can swamp the effects of portfolio shifts. Should the EMU fundamentals reflect the spirit of the Maastricht Treaty and the Growth and Stability Pact, the chances for a euro appreciation will increase. Some caution, however, is in order because the ECB is a new and untested central bank where consensus for a conservative policy may be harder to achieve than can be gleaned from a literal reading of the Maastricht Treaty. Copyright Kluwer Academic Publishers 1998

Keywords: vehicle currencies; transaction costs; financial markets; central bank reputation; portfolio shifts; exchange-rate fundamentals (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (12)

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DOI: 10.1023/A:1008312820408

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