Question from The International Economy Survey of Experts:
Ten years from now, which will likely be the next great global currency?
Contrary to fevered popular speculation in the 1990s, the yen and the mark never had the potential to challenge the dollar as premier international currency: their home economies were smaller than the US and their financial markets less well developed and liquid than New York. The euro, however, is a credible challenger: Euroland is roughly as big as the United States. Indeed, evaluated at the most recent exchange rates, the euro economy has just now surpassed the US economy in size. Also the euro has shown itself a better store of value than the dollar. These are two of the most important determinants of international reserve currency status.
To be sure, rankings of international currencies change only very slowly. Although the US surpassed the UK in economic size in 1872, in exports in 1915, and as a net creditor in 1917, the dollar did not surpass the pound as number one international currency until 1945. In 2005, when Menzie Chinn and I used historical data on central bank holdings of foreign exchange reserves to estimate the determinants, even our pessimistic scenarios did not have the euro overtaking the dollar until 2022. Thus we could not have asserted that the dollar would be dethroned “ten years from now.” But the dollar has continued to lose ground. We have now updated our calculations, particularly to recognize that London is usurping Frankfurt’s role as the financial capital of the euro, notwithstanding that the UK remains outside of EMU. It is also relevant that — at the most recent exchange rates — the GDP of euroland has surpassed that of the US. Now we find that the tipping point could come within the ten-year horizon: the euro could overtake the dollar even as early as 2015.
Simulation of central banks’ reserve holdings: € passes $ around 2015 .
Scenario: Only accession countries join EMU in 2010 (UK stays out),
but 20% of London turnover counts toward Euro area financial depth,
and currencies depreciate at the 20-year rates experienced up to 2007.
Source: Chinn and Frankel (2008, Figure 7).