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International Currency: Dollar, Euro or IMF's SDR


The U.S. Dollar has been a very popular currency to hold worldwide as it has had a reputation for being stable and is accepted in exchange for goods and services in most corners of the globe. However, on January 1st, 1999 the European Union introduced the Euro, which has been accepted as the main currency in a growing number of European countries including Germany, France, Italy, Spain, Greece etc.. As a further challenge to the dominance of the USD China has started pressing to replace the USD as the world's reserve currency with the International Monetary Fund's (IMF) Special Drawing Rights as well as the World Bank's suggestion that the dollar should once again be linked to gold. Lately the Chinese have started proting their own currency too.

Is the exchange rate (the dollar price of the Euro) determined by a fixed or a floating exchange rate system? Is the exchange rate of the Mexican peso in terms of Euro determined in a fixed or in a floating exchange rate system? What about the IMF's Special Drawing Rights: How is their value determined? What about the large amount of money being printed by the Federal Reserve and the huge deficits being created by the US administration? What about the deficit/debt problems of the "Club Med" countries and the effect these problems are having on the value of the euro?


Will the Euro and/or the IMF's Special Drawing Rights or a gold linked dollar or a select basket of currencies replace the US Dollar as the world's most popular currency to hold? Consider the implications being introduced by the debt problems in Europe on the exchange rates between the U.S. dollar, the euro and the other major world currencies.

Assignment Expectations:

A paper detailing why the US dollar might be replaced as the world's reserve currency by the Euro or the IMF's Special Drawing Rights.

Solution Preview

The US dollar as a Global Currency

Since the birth of Euro, debates were raging that the days of the dollar as the world's currency is numbered.

To clear up things, the US did not force the dollar to be the international study. This is supported by the argument of Kee (2007) where he asserted that "it is not the US Government that imposes the US Dollar on the world, but rather the world that had adopted the US Dollar as their collective global currency of exchange convenience, because until the Euro actualized in 2000AD, there wasn't any credible rival global currency."

Helium: Political and Economic theory, "The Euro will soon replace the US Dollar as the global currency" by Alex Kee. Retrieved April 11, 2011.

Will the Euro Replace the Dollar?
According to Papaioannou, Portes, and Siourounis (2007), on their researches on currency, "argue that the euro's rise to major international currency status may no longer be as implausible as many believe".

Perhaps. The authors of this research "argue that the euro's rise to major international currency status may no longer be as implausible as many believe":

Their arguments are these facts:
1. the euro zone is comparable to the U.S. economy in terms of GDP and trade openness
2. the European Central Bank has kept inflation in check
3. the EU experiences nothing like America's current account deficit and external debt, which apply considerable pressures on the dollar
4. In a 2005 survey of central banks, most respondents said they intended further diversification away from the dollar Papaioannou, et. al found out that the optimal euro share is actually lower than what they observe. This suggests an increasing international role for the euro... So far, however, this increased internationalization comes primarily at the expense of the yen, Britain's pound sterling, and the Swiss franc rather than against the dollar.

Economist's View. "Will Euro Replace the Dollar?". Retrieved April 11, 2011.
Optimal Currency Shares in International Reserves: The Impact of the Euro and ...

Solution Summary

This solutions contains arguments on what will be the reliable international currency-- dollar, Euro, or the IMF's Special Drawing Rights.