NCPA - National Center for Policy Analysis

What Will The Euro Mean For The Dollar?

December 31, 1998

The euro is expected to open trading tomorrow at the equivalent of about U.S. $1.20. The 11 European nations committed to the new currency clearly expect it to challenge the dollar as the world's preeminent medium of exchange. How likely is that?

  • The euro is backed by reserves of $350 billion -- seven times those of the dollar.
  • It represents a regional bloc with a population of 289 million -- some 20 million more than the U.S.
  • It is the currency for 11 economies with a combined gross domestic product of $6.8 trillion -- not far behind the United States' $7.25 trillion.
  • The euro nations have combined exports 25 percent greater than those of the U.S. -- and can fairly claim to be the world's leading trading power.

They have persuaded the central banks of Japan, Brazil, Taiwan and China that a significant and increasing proportion of their foreign reserves should be in euros.

While the euro is expected to get off to a strong start, there are uncertainties about its long-term staying power. Euro countries' economies are now turning down sharply -- bringing the prospect of even higher unemployment than the 17 million already registered. Then there is the question of who is in charge -- the central bankers on the ECB Council or the center-left political elite. Political instability could weaken the euro.

Source: Bill Jamieson, "Euro to Challenge Dollar to be Leading Currency," Washington Times, December 31, 1998.


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