A challenge to dollar domination?

FT Alphaville uses a Lord of the Rings metaphor to describe the state of global currencies.

“One reserve currency to rule them all.”

But in the wake of a new working paper from Berry Eichengreen and co-authors Livia Chitu and Arnaud J. Mehl, the blog is asking, “But does it need to be this way?”

Eichengreen, an INET grantee, has done significant research on the change in the global reserve currency from the U.K. sterling to the U.S. dollar in the early 20th century. His research suggests that there is room for more than one world reserve currency in international markets – indeed the dollar and the sterling shared this role for much of the 1920’s and 1930’s.

This new study builds a model that explores how a currency functions in global currency markets. The result suggests some changes for the euro if it is to become a bigger player in global currency markets. The study also acknowledges that while China’s renminbi is on the reserve currency horizon, it’s still a long way off.

Can the euro or renminbi share the stage the U.S. dollar? This new working paper helps provide an answer.

Click here to read the article at Alphaville

Click here to download the Eichengreen paper