From Petrodollars to Petroeuros: Are the Dollar's Days as an International Reserve Currency Drawing to an End?   [open pdf - 170KB]

Almost 70% of the world's international currency reserves--the money that nations use to finance international trade and protect themselves against financial speculators--takes the form of U.S. dollars. The dollar is used for this purpose because it is relatively stable. Because the United States has a major share of world trade and financial assets, certain commodities, in particular oil, are denominated in it. The net result is a large diversified demand for dollars. The use of the U.S. dollar as an international currency, however, has been declining gradually for over thirty years. In the past several years, this reduction in the share of dollar reserves has accelerated with the decline in the value of the dollar and the rise of the euro as a legitimate contender for reserve currency status. Traditionally, speculation over movements in the dollar's value has focused on technical issues surrounding the sustainable size of the country's current account deficit and the relative attractiveness of U.S. financial markets. While these factors still dominate discussion in the financial press, the scope of the debate has broadened to America's "unilateral approach to foreign affairs," and decisions concerning the war on terrorism and the war in Iraq. This document assesses the likelihood of a shift towards petroeuros. What might produce such a new oil pricing arrangement? What factors might help maintain the existing system? What is the possible effect of a change on the United States? Would it be as great as many of the euro oil pricing theorists suggest?

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Naval Postgraduate School, Center for Contemporary Conflict: http://www.ccc.nps.navy.mil
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Strategic Insights (November 2003), v.2 no.11
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