The Euro as a Reserve Currency: A Challenge to the Pre-eminence of the US Dollar?
Bank for International Settlements, Monetary and Economic Department, 2006 - Bank reserves - 29 pages
Well developed financial markets are a necessary condition for a currency to play a role as a reserve currency. The introduction of the euro greatly improved the functioning of euro financial markets. This paper investigates whether euro financial markets have developed sufficiently to facilitate the emergence of the euro as a reserve currency on par with the US dollar. We find that the liquidity and breadth of euro financial markets are fast approaching those of dollar markets, and as a result the euro is eroding some of the advantages that have historically supported the pre-eminence of the US dollar as a reserve currency. This strengthens the incentive for monetary authorities to reconsider the currency composition of their reserves. Nevertheless, the introduction of the euro has not yet resulted in a significant change in the currency composition of official reserve holdings. The US dollar has maintained its place as the dominant reserve currency, supported perhaps by the edge that dollar financial markets still have over euro markets in terms of size, credit quality and liquidity, as well as inertia in the use of international currencies.
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allocated average BlS LlB data calculations central banks coefﬁcient COFER data composition of reserves contracts traded corporate bonds currencies are converted currency composition daily turnover deposits developing countries diversiﬁcation dollar market dollar's share dollar/euro dollars at end-2005 Eichengreen emerging markets end-2005 exchange rates euro area euro ﬁnancial markets euro legacy currencies euro market euro-denominated euro's share ﬁnd foreign currency reserves foreign exchange markets futures futures contract government bonds government securities market Graph inﬂuence international currency investment investors liquidity lMF COFER lMF's macroeconomic medium of exchange monetary authorities monetary union mortgage-backed securities national data network externalities ofﬁcial institutions ofﬁcial reserve optimal outstanding percentage portfolio pre-eminence repurchase agreements reserve assets reserve currency reserve managers reverse repos risk securities holdings share of euro share of reserves signiﬁcant signiﬁcantly Singapore Exchange Sources store of value swaps Swiss franc Table Treasury market Treasury securities unit of account