United States dollar & the Euro

Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): “Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world’s principle reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world’s foreign exchange reserves” (255).

Many of the world’s currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency in favor of the United States dollar.

Since 1999, the dollar’s dominance has begun to be undermined by the euro, that represents an equivalent size economy, with the prospect of more countries adopting the euro as their national currency. Quite a few of the world’s currencies are pegged against the euro. They are usually Eastern European currencies like the Estonian kroon and the Bulgarian lev, plus several north African currencies like the Cape Verdean escudo and the CFA franc.

As of December 2006, the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at this time.