THE COMPARATIVE ANALYSIS OF DOLLAR AND EURO:

In 1998, the European central bank was established following the introduction of Euro in 1999 for the credit transactions as 'virtual currency' in stock exchange, banking etc which later in 2002, evolved to be the non-virtual currency. It was introduced at a value on par with dollar that is 1 Euro equalling 1 dollar. Surprisingly, the value of Euro rose to 1.7$ on the first day of its inception. The Euro was formed merging the currencies of 12 nations of the EU which also included Germany’s mark and France’s franc, the most important currencies before dollar.

Reserve currency has become a significant part in the foreign trade in today’s world. Let us go back to the past to know the different reserve currencies adopted by different countries in the 20^th century. Gold standard was adopted as a reserve currency by almost all the countries in the beginning of the 20^th century. Nevertheless, UK abandoned the gold standard and adopted sterling pound. As UK was the most powerful back then, the entire world began transacting in the pounds relying on UK's decision. US dollar did not show any significance around that time. There comes a time where UK takes back its decision to continue with the fiat money and took to gold standard again, which resulted in the devaluation of pound at an unexpected rate. This pinned all the countries to transact in dollars which gave them a surety of the gold backup. They found stability in the dollars.

Prior to the adoption of dollar as the transaction currency, German mark was used for the transactions for a good period of time. It showed authenticity. But, the World War 2 ruined the stability expected by other countries as Germany was misplaced in the chaos of economic devastation. Thus, the dollar sneaked in and caught hold of the opportunity of becoming the greatest monetary power in the world. When the US left behind the gold standard, the world experienced a smooth flow of dollars which were easily made available as already 2/3^rds of the world had followed transacting in dollars.

After the entire world adopted the fiat money, there was a need for reserve currency which was the means of trade among the countries. There is never a world currency but a dominant currency. How does a currency become dominant? When the central banking emerged in the countries, they resorted to two conditions to decide on their reserve currency. 1) Currency standing stable in the present scenario and 2) Currency to be reliable in future. As US emerged to be the most stable and powerful economy which surpassed all the European countries and Russia, dollar has eventually grabbed the attraction of the people and gained an immense trust.

In 2002, when the Euro was introduced, there was a wide stability seen in the currency adopted by almost all the European countries jointly. This developed a leap of faith in the Euro currency. It was considered stronger compared to dollar. It enwrapped itself without being hit by the USA’s economic crisis in 2008. As it is assumed that the US is being irresponsible in printing the currency, there would come a phase of devaluation of dollar. This resulted in the countries of the world trading in dollars, shift to Euro. When Russia announced that its reserve currency is lumped with Euro, many other countries tried to shift towards Euro too. When Saddam transacted his oil reserves in Euros, Iran followed the same lines. In this way, there was stability found in Euro compared to dollar at one point in time. Then, the great minds stated that it would become a dominant currency by 2020 if the rest of the European countries adopted Euro too.

Unfortunately, the euro crisis had shattered the desire of the emergence of a new world of Euro as a dominant currency. Greece, Italy, Spain and few other countries are in the turmoil of debt traps by themselves which is slowly powering down the stability of Euro which makes its dream far from achieving. There is a tug of war between the dollar and the euro to become the dominant currency of the world, although dollar stands first in the current day currency world. If the euro zone crisis is sorted out as quickly as possible and standing back at a stable position, would gain back the trust in Euro to compete with the dollars and become dominant again.