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| Pristina, Kosovo: The US dollar has been considered the main form of legal tender in the world, but recently the euro has
become a credible rival. Hazir Reka/Reuters/file |
Dollar slips, euro gains credibility as viable rival
But to take the place as banker to the world, the euro may still need to prove itself.
from the December 4, 2007 edition
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The dollar is a "worthless piece of paper," Iranian President Mahmoud Ahmadinejad jeered.
This drop is partly caused by international concern about the mortgage mess in the US and what it may mean for US and world economies. But the dollar's past success and the huge US trade deficit are also part of the problem.
There is a vast trove of dollars stored in vaults around the world. If, say, China tires of watching its dollars become less valuable by the day and decides to trade a large amount for euros, the flood of currency into the market could depress the dollar's value further. This might lead to more dollar dumping and price decline, leading to ... well, you get the idea.
The fact that the US "is running current account deficits and incurring a large net foreign debt threatens to undermine its position as banker to the world," according to Barry Eichengreen, an economist at the University of California at Berkeley.
Thus the dollar's future as world reserve currency crucially depends on the performance of the US economy and America's own policies.
In the short run, the greenback's status is unlikely to be threatened. Too much of the financial world is accustomed to dealing in dollars. Too many computer systems are set to deal with dollar pricing. Too many professionals have invested their careers in following it.
"There is a tremendous amount of inertia when it comes to what we use as medium of exchange," says Mr. Silber.
In the medium term, if the US continues to run huge trade deficits by buying up OPEC oil and Chinese manufactured goods without increasing exports in return, world bankers may think seriously about their options. Enter the euro.
Though not yet a decade old, the euro now accounts for about 20 percent of known world foreign-exchange reserves. Eurozone nations, lumped together, form an economy close in size to the US.
What's missing for the euro is history. It has yet to weather an economic crisis without damage. There's still a small question as to whether all the countries in the euro's zone can keep their economic policies in step.
But it's possible that within 10 years or so the euro will have edged into the dollar's spotlight.
"There is no reason why, several decades from now, two or three reserve currencies cannot share the market," concludes UC Berkeley's Mr. Eichengreen.
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