How Much of a Threat is the Euro to the US Dollar as a Reserve Currency?

The weakness of the US dollar is becoming a big problem:

1) Inflation in Saudi Arabia has hit 27 year highs

2) There have been riots in the U.A.E partly due to the weakening dollar eating into remittances

3) Companies in Europe are beginning to report currency related losses (EADS reports a loss for 2007)

If the US dollar continues to weaken, could it quickly lose its status as the world’s dominant reserve currency?

According to Wolfgang Munchau of the Financial Times, a study conducted by professors at the University of Wisconsin and Harvard University argues that the Euro could overtake the dollar as the dominant reserve currency in the next 10 to 15 years. They feel that the persistent current account deficits combined with a long term decline in the US dollar and the emergence of a genuine alternative to the dollar (the euro) would suppress the international role of the US dollar.

Munchau takes it one step further by arguing that the euro could become the dominant reserve currency even sooner because of the reckless monetary policy of the Federal Reserve, the reluctance of developing countries to maintain a dollar peg in the face of skyrocketing inflation and the increasing relative strength of the European financial system.

The US dollar has not always been the dominant reserve currency because up until the second world war, that title belonged to the British pound. Although I do not agree that the Euro will steal that title from the dollar within the next 10 years, I do believe that the amount of reserves held in Euros will come close to matching the amount of reserves held in US dollars.
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