The sharp rise of the yen against the dollar has unsettled many.
Less noticed has been the decline of the dollar against the euro. Does the strength of the euro presage a power shift in the global economy? And will the euro replace the dollar as the currency to pay for trade and to store in the vaults of central banks as foreign exchange reserves?
Economist Jeffrey Frankel says in a recent article that the euro could surpass the dollar within 10 years. In 2005, he had said this would happen only in 2022.
There is usually a long lag between the decline of an economy and the dethroning of its currency. Frankel says the US overtook the UK in economic size in 1872. But the dollar did not replace the pound as the preferred global currency till 1945. The power shift could be faster this time around.
Are we prepared—as traders, investors and policymakers?