International Currency: Why the Dollar is Available in Europe but the Euro is not Available in the US

International Currency: Why the Dollar is Available in Europe but the Euro is not Available in the US

Memorandum
The current research is focused on the situation in the international currency market. Basically, the position of the US dollar and Euro in the international currency market is discussed. To research the current situation, the analysis of the literature dedicated to the problem is used. The study reveals the fact that the position of the US dollar is better compared to euro because at the moment it is the dominant international currency that has strong position in practically all markets but Europe, where euro dominates. Also the major reasons of the dominance of the US dollar as the international currency are discussed and among them it is possible to single out the wide spread and historical dominance of American currency which serves as a medium of international payments, the large share of dollars in national banks reserves in different countries, the unwillingness of countries and companies to change currency and replaced dollar by euro. Finally, recommendations are given and it is recommended to continue using the US dollar as the main international currency while the use of euro may be justified only in European markets.

Table of contents
1. Executive summary
2. Introduction
3. Background
4. Statement of the problem
5. Purpose of the study
6. Scope
7. Procedures
8. Conclusion
9. Recommendations
10. Works cited


Executive summary
The study focuses on the problem of the current position of the US dollar and euro. Since the introduction of euro, it has been the major competitor of dollar in the international currency market, but dollar historically dominated in the world market and nowadays euro cannot replace it. This is why the problem of the study is identified as the necessity of understanding the major reasons of the domination of dollar. The study explains the unwillingness of companies and countries to refuse from dollar and chose euro instead as a more reliable currency and develops recommendations to companies operating in international markets.


Introduction
The contemporary international currency market undergoes dramatic changes. Instead of the stability of the second half of the 20th century, the last decade is characterized by significant changes that affect the development of the international currency market substantially. Basically, the international markets was and, to a significant extent, still is dominated by the US dollar, which is viewed as an international currency and is used by the overwhelming majority of countries and private companies as the medium of international payment and exchange. At the same time, the position of the US dollar in the international market is not so unarguable as it used to be in the past. In such a situation, one of the major challenges to the domination of the US dollar in the international trade and monetary relationships is the introduction of the new currency, euro, by countries of the EU.
In fact, the introduction of euro was viewed by many specialists as one of the greatest threats to the hegemony of the US dollar the American currency has ever faced in its history since the economic potential of the countries constituting the EU is considered to be at least equal, if not to say superior, compared to the economic potential of the US. As a result, many specialists (Benassy-Quere, 137) forecasted the rapid expansion of euro in the international currency markets and gradual replacement of the US dollar as the medium of international payment and exchange due to the economical potential of the EU and its international economic relationships with many countries of the world.
However, regardless such optimistic forecasts the US dollar still remains the international currency number one and it is still possible to buy easily the US dollar in Europe, including the countries of the EU, while one can hardly buy or one hardly needs to buy euro in the US. Nevertheless, euro has already proved that it is a reliable currency which current position is quite strong. In such a situation, a company entering foreign markets should be very careful about the choice of the currency it will be use in its payments because the choice in favor of the US dollar or euro may determine considerable benefits or, in contrast, losses in the result of the high transaction costs. This is why it is necessary to carefully analyze the current situation in the international markets and evaluate and compare the position of the US dollar and euro that will explain such a striking difference in the spread of the currencies. At the same time, this will provide an opportunity to assess the perspectives of the US dollar and euro as well as define what currency is more preferable to use by the company entering a foreign market.
Background
The contemporary international currency market is characterized by quite complicated processes characterized by the growing competition between the US dollar and euro, which actually define the complexity of choice a company entering a foreign market should make in favor of one of the currencies. In this respect, it is worthy of mention that the competition has not sprung out in a day. In stark contrast, the current competition between the US dollar and euro is determined by the historical development of the two currencies as well as international economic relations at large. It is necessary to underline that the dominance of the US dollar in the world economy as the major international currency is also explained by the process of historical development of the world economy within last half of a century. This is why, in order to assess objectively the current situation and the perspectives of both currencies, it is necessary to briefly dwell upon the historical background of the development of international economic relations in the context of the US dollar domination and its growing competition with euro.
First of all, it should be said that the domination of the US dollar in the world economy as the major currency is determined by the historical development of economic relations after the end of World War II. To put it more precisely, after the end of World War II, the US dollar was actually the only currency that could be used in international economic relations because it was the only really reliable currency that could be used as a medium of payment and exchange in international transactions. In fact, it was probably the greatest achievement of the US monetary policy and American currency in its history since it has manage to occupy the leading position in the world monetary relations in a relatively short time. Such a tremendous success of the US dollar can be easily explained by objective factors that defined the domination of the US dollar.
It should be said that after the end of World War II the economy of Europe, which, objectively speaking, was the only region in the world that could compete with the US in the field of economy due to the high level of its development. Moreover, before the war European countries played the leading role in the international economic relations, especially the UK and France. On the other hand, the war ruined the national economies of European countries, the inflation rates were enormous and European currencies were unstable because of the profound crisis in European economies, including those of the UK, France and Germany, which were regional leaders.
In stark contrast, the US economy progressed rapidly and, though it sounds a bit paradoxically, benefited substantially from World War II or, to put it more precisely, from its final stage and outcome. Obviously, the US became the major suppliers of highly technological products and equipment when European countries were physically unable to produce such products and equipment because many of their plants were simply destroyed. In such a way, the US export grew consistently enforcing the position of the national economy. What is more important is the fact that it is in this period the US dollar became a really international medium of payment and exchange because it was practically the only currency that could effectively used practically worldwide. At any rate, due to the economic help of the US to European countries, including such important and large-scale programs of the US economic aid as the Marshall plan, the flow of the US dollar in European economies was practically enormous. As a result, this currency was used by all participants of American-European economic relations as the medium of payment and exchange. In such a way, along with the economic help to Europe the US managed to enforce the position of its national currency in the international markets.
Taking into consideration the fact that economically European countries were the only major competitor of the US in the world market, it is quite natural that the dominance of the US dollar in Europe led to the dominance of this currency in the world international economic relations (Kenen, 158). Naturally, it is possible to argue that there was also the Soviet bloc which could be viewed as an alternative economic system with a different currency used for purchase and exchange but, in the course of the development of the world economy, the cooperation between all countries of the world grew wider while the Soviet bloc was simply ruined by late 1980s. Moreover, the local economies naturally chose the US dollar as the dominant currency in their international economic relationships.
In such a way, by the end of the 20th century, the position of the US dollar in the international currency market seemed to be unshakable. However, it is worthy of mention that the late 20th century was characterized by the growing integration between European countries. It is necessary to underline that the major moving power of this integration was economic cooperation between largest European countries including Germany, France and the UK. Eventually, the growing integration of European countries resulted in the creation of the common European market and the EU. After that the major challenge to the US dollar hegemony was made – the introduction of the new currency, euro, which became dominant in the EU. In fact, it is the national currency of the EU and its position in Europe, including countries that are not members of the EU, is very strong.
As a result, the beginning of the 21st century was marked by the growing competition between the US dollar and euro as major international currencies, but, in actuality, the position of the US dollar are still stronger and more preferable in international markets, though the perspectives of euro are also viewed as quite good (Howard, 231).
Statement of the problem
In such a way, the modern international market faces a serious problem of the domination of the US dollar and even the introduction of euro, which potentially may be a serious rival that can be equal to the US dollar, has not changed the situation radically. Obviously, such a situation may be quite dangerous because the dominance of the US dollar in the international market puts American companies and American economy into advantageous position compared to the rest of the world.
Purpose of the study
In such a situation, it is necessary to find out the major reasons of the dominance of the US dollar and explain why many companies and countries prefer to chose the US dollar, in spite of potential threat of its dominance.
Scope
In general, the report is based on the analysis of the existing literature and major market trends as well as the analysis of the statistical information concerning the spread of the US dollar and euro, especially in national banks reserves. Naturally, the report has certain limitation. For instance, it is quite difficult to gather information concerning the share of the US dollar in national bank reserves of such country as China, which role in the world economy is growing rapidly and its impact on the international currency market may be enormous. Also, research does not take into consideration some political factors that can influence the position of the US dollar as the medium of international payment, such as military operations, raising oil prices, etc.
In fact, it is necessary to start the report with the analysis of the literature dedicated to the problem, the current situation in international currency market and find out major causes of the dominance of the US dollar. In this respect, it should be said that the historical dominance of the US dollar in the international currency market determined its position as the major medium of international payment and exchange. In this respect, it should be said that the choice in favor of the US dollar would be a logical for a company entering a foreign market because the position of this currency in the international market is quite strong. On the other hand, such arguments as popularity of the currency cannot be applied to economy. Instead, it is necessary to focus on purely objective reasons which can explain the position of the dollar as the main medium of international payment and exchange and, therefore, determine the choice of a company entering a foreign market in favor of this currency.
First of all, it should be said that by the mid-1990s the dollar was used in more than 80% of two-way transactions in foreign exchange markets. At the present moment, its use is still significantly outweighs the use of euro and is assessed around 70% of two-way transactions in foreign exchange markets, but it is worthy of mention that the share of euro steadily grows and, in actuality, euro is the major currency that tends to be uses in the rest part of two-way transactions (Howard, 285). What is more important, euro steadily gains larger share in the international currency market and is more and more often used in two-way transactions in foreign exchange markets. However, it is necessary to underline that euro is basically used when one party of such transactions is represented by a European company, which, as a rule, is situated in the EU.
As for the US dollar, unlike European currency, it is used worldwide and is used in all transactions, regardless companies involved. In practice, this means that the US dollar may be and is used even by European companies, while for the rest of the world the US dollar remains traditionally more preferable than any other currency. On the other hand, it is worthy of mention that the position of the US dollar as the medium of payment and exchange in Europe, including not only the EU but also other countries of Europe that are not members of the EU, decreases dramatically, though it does not necessarily mean that it cannot be used in the EU in transactions between companies.
The absolutely different situation is in the US, where the European currency is a kind of exotic. In fact, for American companies it is simply illogical to use euro in transactions since the losses in the result of such transactions may be quite substantial. In other words, it is quite logical that American companies, as well as non-American companies that operate in American market, avoid the use of euro simply to avoid transactional costs (Kenen, 191). Obviously, the use of the US dollar is consistently cheaper and, therefore, financially more preferable for companies.
In this respect, the spread of the dollar is also very important because, basically, transactional costs decrease proportionally to the spread of the currency. This means that due to the wider spread of the US dollar in the world transactional costs are lower compared to euro. Moreover, the further use of the US dollar may be more convenient for a company than the use of euro again to the wider spread of the former compared to the latter. For instance, if a company receives a payment in the US dollar naturally it would more preferable for a company to use this currency in further transaction, instead of wasting costs on exchange of the US dollar on euro. Furthermore, some companies may simply refuse to accept euro as a medium of payment because of the limited spread of euro. This is particularly true not only for the US companies but also companies situated in North and South America, as well as in many Asian and African countries (Howard, 169).
At the same time, many companies operating in the international market are multinational corporations. This means that they operate worldwide and, therefore, they also need to use the currency that would be spread worldwide and which could contribute to saving transactional costs. For such companies, the US dollar is still more preferable than euro. In actuality, the choice of multinational corporations in favor of the US dollar is quite logical since there are a lot of transactions worldwide they are involved in and, what is more, they also need to invest worldwide (Kenen, 315). In other words, it would be a serious problem of a multinational corporation chose euro and invested in American market or any other market in the world where the position of euro is extremely weak. In such a situation, this multinational corporation would need to increase transactional costs because of the exchange of the currency in order to use the US dollar instead of euro. Obviously, in such a situation, the use of the US dollar by a company, which is supposed to operate in different countries, is more preferable since it help not only save costs but also increase the speed of transactions. On the other hand, if a company is supposed to operate mainly in European market, including countries that are not members of the EU, than the choice in favor of euro would be more logical because of the same reasons that have been just mentioned above for the case of the multinational corporation operating worldwide, including markets where the position of euro is weak. Simply speaking, it is only European market that provides an opportunity for a company to save transactional costs and increase speed of transactions, while the rest of the world is still dollar-dominated (Howard, 324).
Another important argument in favor of the choice of the US dollar instead of euro for a company entering a foreign market is the fact that the overwhelming majority of national banks use the US dollar in their reserves. At the same time, it is worthy of mention that many specialists (Kennen, 247, Krugman, 126) underline that there is a strong link between the use of the US dollar by private companies in international economic relations and the use of the same currency by the official sector and national banks reserves. Basically, they estimate that “financial market use of an international currency takes the lead” and the “use as a vehicle currency is the main determinant of use by the monetary authorities as an intervention currency” (Kennen, 134). In such a situation, the natural consequence is that this in turn “determines use as a reserve currency” (Krugman, 206). For the US dollar is wider used in international market relations than it is quite natural that this currency becomes the “intervention currency” and the “reserve currency”. Also, it is important to underline that the US dollar is the reserve currency of very significant players in the world economy, such as China, for instance.
Obviously, the position of euro may be changed only after this currency gain wider spread in private sector in international transactions. This means that euro should become a medium of international payment and exchange for private sector primarily and, than, it will be naturally chosen as the intervention and reserve currency by the official monetary authorities. The latter fact is very important because the reserves are very significant for the normal and stable operation of a company in a foreign market. For instance, in the case of a monetary crisis in the local market it is the US dollar that will be used to minimize the negative effect or even stop the devaluation of the local currency or, what is even more important, the national currency may be linked to the US dollar while the rate of euro may be quite different from its real value. Consequently, the losses of a company, if it chooses euro, will be inevitable in case of any financial crisis in the foreign market it enters. This is why the use of the US dollar is more preferable again for a company entering a foreign market.
It proves beyond a doubt that market players, i.e. companies operating in the international market play an important role in the use of certain currency not only in the international transactions but also in national banks reserves. There were a lot of reasons in favor of this choice mentioned above, but there is also another one which is not the least important. What is meant here is the traditional preferences of companies. It is not a secret that the change of a currency used by a company in its international transactions is often accompanied by numerous risks. Speaking about the use of euro, these risks increase consistently when one takes into consideration the fact that euro was introduced less than a decade ago.
In fact, euro is a “green” currency and many companies have certain apprehensions to use this currency because there is no long experience of using this currency in international transactions. As a result, companies cannot fully rely on this currency simply because they did not get used to euro as a stable medium of international payment and exchange. On the other hand, the apprehensions of companies in relation to euro are determined not only by sheer conservatism of these companies but also by more objective reasons. To put it more precisely, the US dollar has been used for decades and this currency was characterized as stable and reliable, while euro has been introduced relatively recently and within the short period of its existence its rate has already been susceptible to considerably changes (Howard, 341).
For instance, at the beginning, when euro has been just introduced its rate rapidly exceeded the rate of the US dollar but gradually the two currency became practically equal, while, at the present moment, euro is up again. In such a situation, apprehensions of many companies concerning the use of euro are quite understandable since, on the one hand, they can expect further fluctuations and changes of euro’s rate, and, on the other hand, the use of euro at the moment may be economically less profitable due to its higher rate compared to the US dollar. To put it more precisely, if a company supplies products or services from a European country, naturally using euro for its production, than this company will naturally prefer to sell its products services using euro too, but due to the difference in the rate of euro and the US dollar, the actual price of its products or services will be higher compared to the company that used the US dollar in its transactions for the final price for a customer will be higher if euro is used and lower if the US dollar is used. Consequently, the use of euro or the US dollar will affect the competitive position of the company and its products or services in the foreign market it enters.
Conclusion
Thus, taking into account all above mentioned, it is possible to conclude that in the current situation the US dollar still remains the main international currency. The dominant position of the US dollar in the world market is determined by its historically stronger position in the world and by the current potential of the US economy. However, the use of the US dollar as the medium of international payment and exchange by the overwhelming majority of companies determines its strong position in the international market, while euro has a really strong position in Europe only, though even there the US dollar may be easily used, while in the US, as well as in many regions of the world euro is either not used or is not widely spread to be really competitive with the American currency. Moreover, the US dollar is the main intervention and reserve currency of the overwhelming majority of national banks that strengthens its position even more. Finally, simple conservatism and unwillingness of changes prevent euro from being used by the larger amount of companies.
Recommendations
Thus, in the current situation, it is possible to recommend to a company entering a foreign market to choose the US dollar to reduce transactional costs and increase the speed of transactions, while euro may be reasonably used only when a company is supposed to focus its operation on Europe, including states that are not members of the EU. At the same, it is necessary to realize that in the future the US dollar may lose its position in the international market and, therefore, it is necessary to prepare to use euro, instead of dollar that will reduce the dependency of national economies on dollar.


Works cited
Benassy-Quere, A. “Potentialities and opportunities of the euro as an international currency.” CEPII, Working Paper no. 96-09, 1996.
Howard, F. Recent Economic Trends, Chicago: Routledge, 2000.
Kenen, P. Economic and Monetary Union in Europe: Moving Beyond Maastricht, Cambridge: Cambridge University Press, 1995.
Krugman, P. “The international role of the dollar: theory and prospect.” In J.F.O. Bilson and R.C. Marston. (eds.), Exchange Rate Theory and Practice, Chicago, IL: University of Chicago Press, 1984.