Charles Wasekiwa (National University of Science and Technology) Zimbabwe, bulawayo
International Finance
how the Euro compares to the US Dollar today. What is hindering the Euro from taking over as interanational currency
The comparison of the race for international currency between the US Dollar (US$) and the Euro (€) is centred on the stability of these currencies in relation to size of transactions in the United States of America (USA) as compared to the Euro Zone, freedom from controls, stability of Monetary Policies of the respective issuing states, security of issuing state and the respective support of these fiat currencies. Both the United States Dollar (US$) and Euro (€) are equally freely convertible in the world foreign markets in other words one can move in or out of the positions and as well the movement in value terms of these two currencies in respect to other currencies say Pound Sterling is not correlated.
For nearly a century, the US Dollar has reigned supreme as the world’s top international currency. In recent decades, however, confidence in the “greenback” has been undermined by the United States’ persistent current account deficits and growing foreign debt as high as US$13.77 trillion as at December 2008 vis a vis the rising of the Euro. Increasingly, observers have predicted an end to the dollar’s dominance (Mundell, 1998).
The larger the transactions domain, the more a currency can act as a cushion against shocks. The large transaction domain in USA increases liquidity because of less particular short that depress prices. The Gross Domestic Product (GDP) of the USA is currently standing at around US$14.3 trillion as compared to that of the Euro Zone of US$12.6 trillion.
The liquidity and size of the transactions of the respective currencies can also be explained by the stock market capitalisation in the respective states which figures according to the International Monetary Fund are standing at...