Fundamentally, I think that the dollar will remain the primary reserve currency for the foreseeable future, and any further erosion in its relative position in the system is likely to happen, if it happens, only slowly. It is true that the dollar's reserve role has declined somewhat over the past two decades. Some believe that this process will accelerate sharply because investors will find the euro to be a more attractive investment instrument than the individual currencies it replaces. I believe that these predictions are substantially overstated for several reasons. First, it is likely to take some time for the markets to become comfortable with and confident in the new currency.
Credibility normally takes time to establish.
And even under the best of circumstances it is reasonable to expect some uncertainty to prevail about how the new monetary policy regime in Europe will operate and whether the political context in which it operates will lead to a commitment to price stability as well established as that demonstrated by the Bundesbank. Second, the revolution in European financial markets that many expect to follow EMU will not happen overnight. Yet, there will still be different assessments of the credit risks of the government securities issued by the member states. And the range of instruments available may take some time to match that of the United States capital markets. And, finally, it is difficult to overstate the power of inertia.