Euro and the US Dollar in International Markets Case Study

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Updated: Dec 18th, 2023

The US dollar has enjoyed hegemony in international markets for more than half a century. However, this status has not always been uncontested. In the 1980s and 1990s, a number of scholars proposed that Japanese yen or the German mark as a possible alternative.

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These countries were much less populated and had fewer resources than the US. Furthermore, the size of their economies paled in comparison to the US.

The growth of the euro may possibly challenge US dollar hegemony in international markets because most of the problems prevalent in the yen and the mark are non existence in the Euro.

Factors that make the Euro suitable for trade

The Euro is a currency that spans across twenty three European countries. This implies that the GDP of all these nations are covered by the Euro. When compared to the US, the GDP of the Euro zone still falls behind the US’. Nonetheless, this might not remain constant for long.

If growth rates in the European Union keep increasing, then chances are that the value of the Euro economy will become greater than the US’s. In the events that the UK or Denmark choose the Euro as their primary currencies, then this GDP increase is likely to occur sooner rather than later.

The Euro is suitable for international markets owing to the large GDP that it accommodates and the potential for growth in the future.

If the Euro were to dominate internal markets, it needs to have a home base that is open, greatly developed and free. International currency status must be supported by a well developed money market at home. New York has largely been recognized as the financial capital of the world.

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Currently, Frankfurt may be regarded as the home of the Euro. Analysts state that, as a financial marketplace, it still pales in comparison to New York.

However, if the United Kingdom joins the Euro zone, then it could bring its highly developed financial markets in London and this could increase its chances of toppling the dollar as a dominant world currency.

Perhaps one of the most critical factors that make the Euro desirable is the strength of the currency. The value of any international currency must remain steady over a relatively long period of time. This is largely because several central banks use it as a currency reserve.

Alternatively, some businesses may invoice other international partners with the currencies, so they keep currency balances. Additionally, investors use international currencies to hold their bond assets. Such institutions require a currency that is free from inflation and is relatively stable.

In the 1980s, Japan and Germany threatened the US’s international currency status because they kept their inflation rates at a much lower rate than the US’s. The value of a currency may fluctuate owing to current account deficits, as well.

The Euro is much stronger in this regard because debt levels in the US are much higher. Inflationary pressures are likely to be higher for the US dollar than the Euro.

Desirable international currencies must also enjoy huge networks. They need to reflect their global status by having a high degree of circulation. Many countries will utilize an international currency only if they believe that other people are likely to use it.

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This implies that even though a certain currency has flaws, people will be willing to overlook them in order to be secure network capabilities. The problem with international money markets is inertia towards new currencies. It is likely that stakeholders will still be hesitant about changing the US dollar in the short run.

However, if the strength of the Euro persists then this could reach a tipping point at some point in the future. A case in point was the US dollar before it overtook the pound. The US dollar had a stronger value than the UK pound from as early as 1872.

US exports exceeded the UK’s in the 1915, yet international markets still used the pound as the primary international currency. Possible explanations include the slow development of a central bank in the US and inertia in financial systems over the older currency.

However, in 1914 the US became a net creditor while the UK reversed from creditor to debtor. The trend mostly emanated from the First World War, which caused the UK to borrow heavily from other nations like the US. At the end of the War, the dollar was the only currency that stakeholders could convert into gold.

At this time, the dollar became more dominant in international finance and continued to spread to different parts of the world. The UK continued to lose most of its colonies, its military clout as well as its economic eminence.

However, it took another 20 years before the dollar officially toppled the pound as dethroning took place in 1945.

Therefore, one may assert that even though the Euro currently seems stronger than the dollar, markets will still remain static for a relatively long period of time. Replacement may take place more than two decades after the decline of the US dollar.

Why the US dollar is falling out of favor

The US dollar may be playing a vital role in international markets but it has been depreciating for the past 40 years. Forty decades of poor performance is enough to raise concerns and objections from other partners.

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In the 1970s, some stakeholders objected to the Bretton Woods system, and they even proposed other alternatives. In the 1980s, the depreciation of the dollar was also another cause for concern. In the late 2000s, these patterns have continued to increase and now possible alternatives are being considered.

The Japanese and German currencies were not a threat in the past because these countries were close allies of the US. The latter were emerging economies that had a lot of leverage at the time. Currently, emerging economies include Brazil and China, which are not as loyal to the US as Japan and German.

This means that when considering replacements for the dollar, these economies will be more willing to try out new versions.

Perhaps one of the biggest problems that many international players have with the US is the global financial crisis of 2007 and 2008. This problem started at the heart of the US’s financial capital; Wall Street.

Many countries developed a serious mistrust of the dollar after the problem because many of them bore the brunt of the crisis.

As mentioned in earlier sections of the paper, an international currency needs to have a strong and deep financial market at home. If people lack confidence about this fact, then chances are that they will consider other currency alternatives.

The value of the US dollar has been an object of much concern in international circles. This stems from economic challenges as well as inflationary pressures on the currency. The USA is now known as the most indebted nation of the world.

Furthermore, it has used up most of its currency reserves, such that it now depends on countries like China and Russia for credit. It should be noted that these are countries who were former rivals. The country’s trade deficit is highly unimpressive.

Imbalance of trade indicates that the economic fundamentals in the country are quite shaky. An undisputed international currency leader should be supported by a stable and strong economy.

The trade deficit in the US has increased by 40% when compared to the Euro zone’s, so this heightens the possibility of overtaking by the latter.

The dollar has been an anchor currency for several markets around the world, but many are starting to worry about its frequent fluctuations. Many countries are concerned that the dollar is not playing its role of anchoring the system as it is becoming quite shaky.

The key challenge for the US dollar is the fact that its balance of payments is highly affected by attempts to provide liquidity to other financial markets. The central role of the dollar in international monetary system means that the country’s weakening financial position will remain as such.

This responsibility has caused a greater deficit for the country and there will be a point when such debt levels will be unsustainable. If the US uses dire measures such as quantitative easing; that is, introducing more dollars into their system, creditors, such as China, will have to bear the brunt of diminished foreign credit.

The latter nation has 2.4 trillion dollars worth of currency in its central bank. Therefore, it will lose a great deal of value if the US were to take such actions. It is no wonder that countries like China are considering other alternatives like the Euro.

Key obstacles to Euro domination of international markets

First, the Euro has a highly fragmented market in which most treasury bonds markets are smaller and independent. Large players like China would find problems investing in the Euro because the debt markets in the Euro zone are too fragile to tolerate such large investors.

The bonds markets alone would report low interest rates and this would lead to market collapse.

Some of the key problems with the Euro have also been cited above. For instance the financial market capital of the Eurozone is still relatively weak. The choice of the UK to stay out of the Euro also makes it difficult to sell the Euro as a better alternative.

Besides these factors, Europe still lacks a united foreign and economic policy. It does not even have a finance ministry; so much is yet to be done.

One may, therefore, wonder what role the Euro is playing in international markets currently. The primary function of the Euro in international currency systems is its ability to challenge the hegemony of the dollar.

Analysts believe that existence of only one dominant currency makes stakeholders quite vulnerable to the dynamics in that one nation.

A strong Euro could create competition and sharpen the US’s ability to control is own currency. The presence of more than one stable international currency would mean greater efficiency and stability within the global monetary system.

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IvyPanda. (2023, December 18). Euro and the US Dollar in International Markets. https://ivypanda.com/essays/euro-and-the-us-dollar-in-international-markets/

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"Euro and the US Dollar in International Markets." IvyPanda, 18 Dec. 2023, ivypanda.com/essays/euro-and-the-us-dollar-in-international-markets/.

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IvyPanda. (2023) 'Euro and the US Dollar in International Markets'. 18 December.

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IvyPanda. 2023. "Euro and the US Dollar in International Markets." December 18, 2023. https://ivypanda.com/essays/euro-and-the-us-dollar-in-international-markets/.

1. IvyPanda. "Euro and the US Dollar in International Markets." December 18, 2023. https://ivypanda.com/essays/euro-and-the-us-dollar-in-international-markets/.


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IvyPanda. "Euro and the US Dollar in International Markets." December 18, 2023. https://ivypanda.com/essays/euro-and-the-us-dollar-in-international-markets/.

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