| Will Euro Dominate the US$ |
After high expectations of creating a shakeout for the dollar currency, the euro was at last launched on 1st January 1999. Amid these expectations, euro could not meet the dollar level even after two years of its launch into the market and infact had subsided gradually. How important is the euro as a global currency compared with the dollar, and can we differentiate the position of the euro as a medium of exchange in international trade?
The euro became the world's second currency, after the dollar and before the yen. The euro countries account for 14 per cent of world GDP and 17 per cent of world trade. They are comparable with the United States, which accounts for 19 per cent of world GDP and 14 per cent of world trade. If the UK and the three other EU countries outside EMU were to join, the euro-15 share in GDP would rise by a quarter to 18 per cent of the world total, almost the same or even more than that of the US.
Most of the times in history there has been a hierarchy of world currencies, with one dominant, one or two others subsidiaries, and the rest nowhere. The dollar still accounts for 36 per cent of all international bank loans, compared to 20 per cent for the euro-11, and 24 per cent for the euro-15. The share of euro-11 has fallen from about 24 per cent to 20 per cent, as international claims between euro countries in each other's currencies have become domestic claims in euro. Domestic bank loans in Europe are however, greater than those in the US, where securities markets play a much bigger part in corporate financing.
The dollar still makes up 70 per cent of world foreign exchange reserves, compared with 11 per cent for the euro-11, or 14 per cent for the euro-15. The dollar's share has risen, because ECU reserves within the euro area drop out of the calculation. However, the euro has seen a small increase in its share of the foreign exchange market compared with the Deutsche Mark. DM/$ trades, using the dollar as a vehicle to move into other euro currencies have disappeared, while trades between other euro currencies and the dollar have been added to those between the DM and the dollar. The spread on e/$ trades has come down to 3 basis points from 4-5 on DM/$ trades. The euro is now used as a vehicle between non-euro European currencies, as the DM was, but the use of the Swiss franc for this purpose has surprisingly increased.
In view of the Asian financial crisis, trading among euro currencies has not been replaced by the expansion of dealings between the euro and emerging market currencies. Trades with the dollar on one side of the transaction still dominate at 47 per cent of the total, double the share of the euro, which is itself double the share of the yen.
The euro however has made good progress in the Futures market. On a typical July day in the year 2000, 710,000 contracts in German euro government bonds were traded on the German Eurex exchange, compared to 200,000 US Treasury contracts on the Chicago Board of Trade.
While the use of the euro inside EMU is supply dominated, its use as an international currency is demand driven and therefore more competitive. The role of the euro depends, therefore, on international market preferences as well as on its ability to challenge the dollar in terms of liquidity and transaction costs.
The European Union will remain one of the largest exporting zones in the world. This will boost the euro as an international invoicing currency and means of payment. However, the preference of the EU main trading partners might also shift to the euro when exchange rate variations are expected to be limited.
The role of the euro is certainly greater than that of the euro countries in the world economy, which is similar to that of the United States. But it does not exceed the domestic role of the euro by as wide a margin. The rest of the world outside the US and Europe is a vast area in which competition between the two currencies should lead to greater efficiency in monetary and financial services, both internationally and within the two home territories.
K Venu Babu
Feedback Rate this article