However, economists have given little attention to what the euro will imply for the rest of the world. Economists split into two camps on this question. Another camp, however, argues that the creation of the euro as a rival to the dollar may encourage central banks and investors to diversify out of dollars, pushing the greenback down. The effect of EMU on the dollar largely depends on how both European and non European central banks adjust their reserve holdings. Consider European central banks first.
Central banks hold reserves for two main reasons.
After EMU goes ahead, the need for participating countries to hold reserves will decline on both counts. They will no longer need such big war chests to defend their currencies' positions in Europe's exchange rate mechanism against speculative attacks. And after monetary union, member countries will need to pay for much less of their imports with foreign currency because trade between them will take place in euros. However, EMU will also automatically reduce participating countries' reserves, because those that are currently held in other EU currencies will no longer count as foreign exchange. The D -marks held by the Bank of France, for instance, will be converted into euros.