Internationalization of currencies: The case of the US dollar and its challenger euro

This article examines the benefits and costs to the United States of having the US dollar used as an international currency and explains the factors underlying the dollar's use internationally. The main benefit for the United States is that it derives seigniorage from the dollar's international use while the main cost is that there is less scope for controlling domestic monetary conditions. There are three prerequisites for the international use of a currency: (1) confidence in the political stability of the issuing country; (2) deep, broad, and open financial markets in the issuing country; and (3) a large share of world exports on the part of the issuing country. The implications of the euro for the dollar's leading international position are discussed. Data are presented showing that the dollar is the world's leading international currency.