Note: Sample below may appear distorted but all corresponding word document files contain proper formattingExcerpt from Term Paper:
In demonstration, Gross notes the anecdote of a drug mule traveling from Spain to Colombia, in whose stomach officials found $197,000 in euro notes (Gross 2007).
While the underground economy serves as an indicator of stability and value for the currency market, this stability and value are influenced by a confluence of further economic factors in addition to the ones already mentioned above. Chinn & Frankel (2005:15) focus on four specific factors that influence the future probability of euro dominance over the dollar.
The first of these is patterns of output and trade. This relates to the already-mentioned amount of market presence of a certain currency. Currently, the U.S. dollar enjoys the greatest presence in the world economy. Interestingly, the authors hold that, if output and trade are regarded as measures of a country's economy, Japan should be the second in the world. However, other factors such as economic size and natural resources also play a role in the country's economic position. Japan is much smaller in terms of population size, land area and natural resources, while the euro on the other hand is used to the exclusion of all other currencies in 12 countries, whose combined economic size is far greater than that of either Germany or Japan. Because of this fact, the euro more than any other currency has the potential to override the U.S. dollar in economic importance. Indeed, the authors hold that only the addition of the United Kingdom, Sweden, and Denmark to the EMU is needed to equal the economic size of the United States, while the addition of the other 10 would result in euroland surpassing the United States. The authors however note that this is also dependent upon the growth rates of the different economies, as well as trading volume.
The second factor addressed by Chinn and Frankel is the financial markets within a country. International currency status is dependent upon the freedom of control and the development level of the capital and money markets in the home country. In this, the dollar enjoys precedence over the euro, while the large financial marketplace in London benefits the pound rather than the euro. Currently, New York and London represent the largest financial centers. If the United Kingdom were to adopt he euro, it is clear that it would become a significant rival for the dollar currency. In terms of political factors, the authors cite that a strong central bank and large financial sector are necessary in order to counter political influences in order to maintain the strength of the currency. The political sector often has its own agenda in terms of either appreciating or depreciating the currency. A large financial sector will then be able to resist such influences.
The third factor relates to external factors such as the confidence in the currency value (Chinn & Frankel 16). Value confidence relates to the stability of a currency. Here the underground market provides an indicator of confidence, as mentioned above. This confidence is dependent upon a variety of factors, including that the value of a currency should not fluctuate erratically. Stability of inflation and future value is critical for the success of the currency. During the 1980s, the United States have shown a higher inflation rate that Japan, Germany and Switzerland, but a lower one than the United Kingdom, France and Italy. The 1990s however showed a better inflation performance for the United States. This is however set against the fact that the United States has incurred large-scale debts, which may result in downward pressure upon the dollar. These fears lead to both potential instability in the dollar market, as well as the unattractiveness of investing in this market.
A fourth important factor, as noted by Chinn & Frankel (17), is network externalities. Here also the inertia mentioned by Galati and Woodridge plays an important role. In terms of network externalities, inertia means that, whatever currency was used most frequently in the past continues to be prominent in the marketplace simply because this is the economic habit. Change is the path of greater resistance, and hence, unless there is a particularly strong incentive to do otherwise, the greatest likelihood is that the most popular currency will continue to be used. The assumption is that this is the most likely currency to be used by others. This assumption then drives the continued use of the dollar, regardless of other potentially negative factors related to the currency.
As noted above, the authors assert that any change within the major currency is not likely to occur within the near or sudden future, because of inertia and habit. Indeed, the factors in favor of the euro identified above are but minor changes that are not in themselves sufficiently significant to bring about major changes in the dominant reserve currency. Furthermore, the authors note the presence of unforeseen phenomena: unforeseen factors may result in unforeseen changes in the market, making it difficult to predict particular changes in the market.
It is also however important to note that the changes and trends are indeed important in the long run, particularly when seen in terms of the political future. As substantiation, the authors note the continued dominance of the pound even decades after the decline of the home country itself. While inertia was responsible for this, the dollar did eventually follow its home country in becoming a dominant global force.
According to Galati & Wooldridge (2006:8) further factors that need to be considered when estimating the future importance of the Euro as reserve currency is the manner of its use. In this, the authors distinguish between the official and private use of the international currency. In the official sector, for example, foreign currency might be held for the purpose of supporting their use of the exchange rate, to intervene in the foreign exchange market, or to safe keep wealth. Individual use on the other hand might relate to functions such as invoicing or trading; in other words, these uses relate more directly to private business dealings for financial profit. Official use is generally related to the reserve of foreign currency for a country.
Interestingly, the authors note that the reserve use of a currency in the official sector depends not so much upon governmental intervention as it does upon the private use trend. When the private business sector tends towards using the dollar, for example, this would drive the official use of the dollar as well. The increasing private use of the euro therefore substantiates projections for increasing official use of this currency as well. Concomitantly, the authors note that the reverse could also be true: the official use of a currency may also drive its private use. Most likely, the two sectors have a mutual effect upon each other, while also driven by the above-mentioned inertia factor that currently tends to favor the dollar.
Apart from specific official and private use, Galati and Wooldridge also hold that macroeconomic stability is a primarily important factor in the continued use of a certain currency. Price stability is an important factor in this, and also drives the confidence in the value of the currency. Current trends, as seen above favors the euro rather than the dollar in this regard. Neither the private nor the official sector will be likely to use a currency that is fundamentally unstable or shows itself to be weak within the marketplace. This is one of the factors that have fuelled the debate regarding the possible replacement of the dollar with the euro as the global reserve currency.
According to the authors, the above stability of the foreign currency will also induce inertia. The four factors relating to the international status of a currency change slowly. This induces both inertia and stability, meaning that the currency will maintain its position for as long as it can promise a non-sudden evolution, inducing confidence in the currency.
The main problem with the dollar is its increasingly apparent instability as a result of the increasing debts of the United States government. This appears to indicate a rising crisis, which also lowers the current confidence in the currency. The fact that authors during 2004 already began to indicate the low confidence of the underground sector in the dollar currency appears to indicate that the currency might face future troubles. Concomitantly, the fact that a viable currency to replace it is available appears to indicate that this may become a reality, as predicted by an increasing amount of reports.
Bo Nielsen (2007) addresses the issue of the dollar and the U.S. economy. According to the author, the United States has been scrambling to remedy its global reserve position. The Federal Reserve for example has planned four actions to add up to $24 billion to the European Central Bank and Swiss National Bank to fortify its international position. To stimulate local growth, the Bank has also reduced its target…[continue]
"Euro As Reserve Currency The" (2007, December 19) Retrieved December 4, 2016, from http://www.paperdue.com/essay/euro-as-reserve-currency-the-33156
"Euro As Reserve Currency The" 19 December 2007. Web.4 December. 2016. <http://www.paperdue.com/essay/euro-as-reserve-currency-the-33156>
"Euro As Reserve Currency The", 19 December 2007, Accessed.4 December. 2016, http://www.paperdue.com/essay/euro-as-reserve-currency-the-33156
reserve currencies, with specific reference to how an asset manager should approach the issue of diversifying into multiple reserve currencies in order to achieve better stability in asset value. While the U.S. dollar and the euro are the world's two leading reserve currencies, two new currencies have been added by the IMF to the list of reserve currencies. These are the Canadian dollar and the Australian dollar, both being commodity-driven
economic history has shown that the U.S. dollar has fallen from its previously held top position in the world market. This fall has affected all other existing currencies, and particularly the Euro. Many hold that the major problem entailed in the current-account deficit of the United States began with Richard Nixon removing the U.S. currency from the gold standard in 1971. The oil supply of the world was then traded
Currency Markets The currency exchange market is an inter-bank or inter-dealer market that was established in 1971 when floating exchange rates began to materialize. Trading is not centralized, as is the case with many stock markets (i.e. NYSE, ASE, CME) or as the case for currency futures and currency options, which trade on special exchanges. Dealers often "advertise" exchange rates using a distribution network, then use the information "agree" to a
History of the euro can be traced back as far as World War II when European leaders agreed that economic ties could promote growth in Europe (Martel). As a result of the Bretton Woods (New Hampshire, USA) agreement of 1944, the International Monetary Fund (IMF) opened for business in 1947 and a fixed rate of exchange was set between the U.S. dollar and other world currencies, based on the gold
Euro had a positive effect upon its members? The euro has been the currency of the European Monetary Union (EMU) since January 1, 1999 (Auswartiges Amt, 2004). The euro was introduced slowly for member states. It has been a deposit currency since January 1999 and notes and coins have been in circulation since January 2002. Since March 2002 most European countries have exclusively used euro and cent as their currency. The
Thus, the monetary policy of ECB cannot address the economic need of individual member states. The British Retailing Consortium estimates that British retailers would have to spend between 1.7 billion pound and 3.5 billion pound to train people to use Euro and make the appropriate transitions. But this appears feasible for the present 12 members of the Euro area. References Lawless, Andrew. "The Euro - an assessment of the Euro, and the
Cross-Country Capital Flows and Currency International Project overseas investment . GLOBAL INSTITUTES IN INTERNATIONAL FINANCE . INTERNATIONAL FINANCE CORPORATION . WORLD BANK . WORLD TRADE ORGANIZATION INTERNATIONAL MONTARY FUND . INTERNATIONAL FINANCE IN CHINA . BANKING INSTITUTES NON-BANKING INSTITUTES THE EXCHANGE RATE FIASCO FINANCIAL CRISIS IMPACTS ON SINO-AMERICAN RELATIONSHIP RECESSION'S AFFECT ON CHINA . ASIAN MONETARY FUND . CHINA'S TRADE POLICIES AND THEIR CONTRIBUTION TO THE FINANCIAL CRISIS Monetary policy is the study of circulation of money, the granting of credit, the making of investments and