COULD THE EURO CRASH THE DOLLAR?

could the euro crash the dollar top

In 1999, when the Euro comes into existence, for the first time since World War II nations of the world will have a place to go if they want to get out of dollars. The single Euro currency will replace 14 others, lessening foreign exchange reserve requirements of the respective European central banks Рmost likely triggering a liquidation of dollars they now hold in reserve. Anyone in the world who has held foreign reserves to handle transactions with Europe will likewise need fewer reserves and therefore fewer dollars. Simple risk avoidance also will call for replacing some dollar reserves with Euro reserves. Both effects lead to the sale of dollars. Additionally, since the new Euro will undoubtedly climb in value against the dollar, American investors will likely sell dollars short and move into Euros. If a run started, the amounts of money that would flow out of dollars would quickly drain America’s foreign exchange reserves. Foreign central banks can always buy those dollars, but doing so means rapidly expanding their own domestic money supplies and increasing inflationary pressures. As a result, they are apt to demand austerity policies in the United States as we demanded austerity policies in Mexico in early 1995. With the Euro as a viable alternative to the dollar, the temptation to jump out of dollars into Euros whenever the dollar looks weak is going to be very high.

 

 

 

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