The Role of the American Dollar and the Prospective Room for the Euro as an Important Intervention and Reserve Currency

Abstract

For nearly a century the US dollar has been unchallenged as the sole and later the most important reserve and intervention currency in the world. The dollar became such an important currency after the shift from the British pound which, during the gold standard, was the world's reserve currency until the first decades of the XX century. The dollar detained its primary importance even after the breakdown of the Bretton Woods system despite several different currencies like the German mark, Japanese yen, Swiss franc, French franc etc., have been occasionally serving as reserve currencies. The situation considerably changed after introducing of the euro which in the first decade of the XXI century exceeded 20% share in reserves of central banks and became the second after the US dollar reserve and intervention currency. This was the main factor increasing the demand for the euro and increasing the pressure on appreciation of the euro exchange rate unless the authority responsible for the supply of that currency is able to increase it. Many circumstances indicate that the pressure on appreciation of the euro may increase and this becomes a great challenge for the authority issuing the already second significant reserve currency in the world. Until now the Eurosystem remains somewhat powerless to manage successfully the above mentioned challenge so an important question arises how this situation might be improved. Nevertheless the room for the euro exists but the possibility to increase its reserve holdings and share depends on some necessary adjustments mainly in the treaty framework of the European central banking. This essay is a part of the wider project concerning the future of the euro of the euro area and their significance in the international financial system.