Euro vs. Dollar

New working paper from Chinn and Frankel:

The US dollar is still the international reserve currency most used by central banks. What factors determine the shares of major currencies in the asset portfolios of central banks? Is the dollar's primacy going to last? A serious competitor, the euro, is on the scene now. Will Europe's common currency overtake the dollar? Over the next ten or twenty years which is the most likely scenario?

... Central banks prefer to hold currencies of large economies characterized by low inflation and low exchange rate volatility - signs of currency stability. Whether the euro will overtake the dollar as the leading reserve currency crucially depends on the adoption of the euro by the United Kingdom, and to a lesser extent by other member countries of the European Union. The persistence of the dollar's recent depreciating trend and the slow pace at which central banks change the composition of their asset portfolios will also play an important role in the competition between euro and dollar.