The U.S.

Dollar as the Dominant International Currency Before the Creation of the Euro
The U.S. dollar was the dominant international currency, serving as a unit of account, medium of exchange, and store of value not only for domestic transactions but also for private and official international transactions before the creation of the euro at the beginning of 1999. Case Study 11-2 in the text shows that the U.S. dollar remained the dominant international currency in 2002. Comparing the data shown in the table below for 1998 with the data provided in Table 11.2 in the text for 2002, we can examine how the position of the dollar was affected by the introduction of the euro and the position of the euro as the second most important international currency. The following table shows the relative importance of the dollar and other major currencies in the world economy in 1998. The table shows that 49.8 percent of foreign exchange trading was in dollars, as compared with 17.2 percent in German marks, 11.6 percent in Japanese yen, and smaller percentages in other currencies. The table also shows that 69.8 percent of international bank loans, 45.0 percent of international bond offerings, and 48.0 percent of international trade invoicing were denominated in U.S. dollars. Also, 60.3 percent of foreign exchange reserves were held in U.S. dollars, as compared with much smaller percentages for other currencies. Although the United States gradually lost its position as the sole international currency that it enjoyed at the end of World War II, it remained the dominant international currency in the world in 1998 and in 2002. TABLE Relative International Importance of Major Currencies in 1998 (in percentages)

Foreign Exchange Trading a

International Bank Loans b

International Bond Offeringsb

Trade Invoicing c

Foreign Exchange Reservesd

U.S. dollar Deutsche mark Japanese yen Pound sterling Swiss franc French franc Other currencies

49.8 17.2 11.6 6.1 4.0 2.9 8.4

69.8 3.3 0.2 15.6 1.1 5.3 4.7

45.0 16.8 4.5 8.9 2.6 6.4 15.8

48.0 17.0 8.0 7.0 0.0 8.0 12.0

60.3 12.1 5.1 3.9 0.7 1.3 16.6

Sources: aBank of International Settlements, Annual Report (Basle: BIS, 1999). b OECD, Financial Market Trends (Paris: OECD, February 1998). Data are for 1997. c ECU Institute (1995). Data are for 1992. d IMF, Annual Report (Washington, D.C.: IMF, 1999).
Version 6.0.8: 9f8dc4e/1.0.2.250

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