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Euro gives dollar a run for the money

By David R. Francis / January 8, 2007



The US dollar, as an international currency, is facing its strongest challenge in decades. Some pin-striped central bankers are diversifying modestly in their official foreign-exchange reserves – out of dollars and into euros, the common currency of 13 European nations. It's suspected that, among criminals, the 500-euro bill (worth about $660) rivals the $100 greenback as a way to sneak cash across borders.

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Most experts don't foresee a dramatic shift out of the dollar. It's likely to dominate the international sphere for years, if not decades, to come.

Nonetheless, the dollar's declining value last year on foreign-exchange markets and the continuing massive US trade deficit are trampling the reputation of America's currency.

"The euro is catching up, probably very rapidly," says Peter Pietsch, an economist at Commerzbank in Frankfurt, Germany. At this time, the dollar and euro are the only two important international currencies, and they are "competing fiercely against each other."

"It's always good to have competition," he adds.

Some signs of the euro's global gains:

•As of this past autumn, the value of all euro notes in circulation worldwide exceeds the value of total US currency. With each euro worth about US $1.33 on the foreign-exchange market today, the 628 billion euro notes in circulation on Dec. 22 are worth $828 billion, exceeding the $753 billion of American currency in circulation as of Dec. 18.

The European Central Bank expects the number of euros in circulation to shrink a little with the end of the Christmas demand for cash. But last week, the European Monetary Union welcomed its 13th member nation, Slovenia, the former Yugoslav republic. That adds a little to the demand for euros.

One explanation of this phenomenon is that Europeans tend to use cash more often when paying for goods and services; Americans offer credit cards.

•Seeing the dollar's decline in value – 11 percent against the euro in 2006 – some central banks and finance ministries have been diversifying their financial assets and transactions into euros.

Iran stated last month that it will use the euro instead of the greenback for its foreign-trade transactions, including oil sales. Considering Iran's political clash with the US on uranium enrichment, the news didn't surprise foreign exchange markets.

Other oil-rich nations are shifting to the euro. So is Switzerland, it's reported. The central bank of the United Arab Emirates, a close US ally, said it would convert eight percentage points of its foreign-exchange reserves into the euro. At present, some 98 percent of the UAE's $25 billion in reserves are in dollar investments.

New data from the Bank for International Settlements (BIS), an institution in Basel, Switzerland, that serves major central banks, shows that Russia and members of the Organization of the Petroleum Exporting Countries have cut their dollar holdings from 67 percent in the first quarter of 2006 to 65 percent in the second quarter. The euro's share of their overall financial holdings rose from 20 to 22 percent.

That shift may seem modest. But it reflects a change of sentiment toward the five-year-old euro in the financial world. The euro is now recognized as a solid currency, worthy of succeeding the former deutsche mark as a bastion against the depredations of inflation.

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