DOLLARS VERSUS THE EURO: WILL DOLLAR BE THE DOMINANT CURRENCY IN TEN YEARS' TIME?

INTRODUCTION In the current tougher business environment, international trade is getting more and more present and therefore important, due to a fast growing globalization. The use of international currencies has become unavoidable and this, for many purposes, ranging from hedging to transaction costs. This paper will focus on two currencies, the euro and the US dollar and try to figure out whether one of those will be the dominant currency in ten years' time. To do so, we will first look at both currencies' past information and explain their most important characteristics. Secondly, we will compare these two currencies, leaning on recent relevant articles, explain their advantages and drawbacks and imagine a couple of scenarios which might take place in the following years. Finally, we will try to make a prevision about the role of both currencies in the future world of international trade. LITERATURE REVIEW After the euro zone creation in 1999, the role of central banks, the advantages and drawbacks of a single currency systems and comparisons between the US and the European case have interested many researchers. Alesina and Barro (2001) explained the dollarization phenomenon and highlighted that the current globalization is the main reason why multi-country currency unions are and will become more and more important in the future international economy. This article was followed by many interesting papers focusing on monetary unions, such as Salvatore (2002) who focused on the benefits and costs of the euro and compared the strengths and weaknesses of single currency systems. He highlighted the crucial function of the ECB on the functioning of the euro monetary system. One year later, Cooper and Kempf (2003) leaned on a complex quantitative to identify that reduced transactions costs and lower inflation were that most relevant benefits from monetary unions. By solely comparing the currencies in terms of their role as reserve currencies, Chinn and Frankel (2005) said that the euro might increase its share of foreign reserve currency and eventually go beyond the share of the dollar as a reserve currency if the U.K. were to adopt the euro and if the depreciation trend of the dollar would last. Finally, Dominguez (2006) said that it is commonly agreed to say that the US economy can overpass important crisis due to the longevity of the US dollar. However, the euro aptitude to go through an important crisis has still to be proved. EURO VERSUS DOLLAR Most of the non-expert people believe that every country has its own currency. Historically, it was relatively correct. But nowadays, partly due to the explosion of the international trade, several strong monetary unions have emerged and the number of currencies is decreasing. Indeed, many countries use other country's currency as their official currency. This transition process from a local currency to a foreign country's currency has first taken place in US dollar and is therefore named dollarization. This term can also be applied to other currencies than the US dollar. We will assume in this paper that this term is applied to one country's utilization of another country's currency. According to Alesina and Barro (2001), globalization as well as the increasing number of independent countries explain why the world is not in a one-country/one-currency model anymore and has shift toward multi-country currency unions. To refer to several dominant currencies being used by more than one country; the members of the EU use the euro, the members of the African Financial Community form the franc zone, seven Caribbean countries form the Eastern Caribbean Currency Area, the US dollar is also used by Panama as well as several other smaller countries and the British Pound is used in almost a dozen different countries. In this regard, why choosing euros and US dollars as candidates for the future dominant currency? Among these currency unions, one currency has historically always been the dominant currency in international trading and is still considered as the dominant currency in the market place; the US dollar. …