Will the Euro Ever Replace the US Dollar as the Dominant Global Currency?

Very few currencies –so far only three– have been able to become leading or dominant international currencies in the world’s history. Those that have done so tend to become monopolistic due to the centripetal forces derived from the existence of economies of scale, economies of scope and network externalities in their use.

However, these centripetal forces tend to be counterbalanced by the opposing centrifugal forces derived from the need by investors to diversify their asset portfolios by currency due to the existence of a negative correlation between the two leading currencies. This is the reason why the incumbent currency is always followed by a competing second candidate currency.

The euro’s share in the different international markets is, on average, still much smaller than the US dollar’s, with minor exceptions. The rate of growth of its share, in the 10 years since its creation, was high at first and lower later, coinciding with an accumulation of global imbalances. In any case, its present rate, if maintained, could be enough to overtake the US dollar before the end of this century.

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