Are the Dollar's Days Numbered?

A year ago, the dollar bestrode the world like a colossus. Now it is humbled and the euro looks triumphant. Is the dollar on the way out as the world's unchallenged reserve and trade currency? Or is "euro triumphalism" premature?

That question preoccupies not only speculators tracking the dollar's decline, but ordinary businessmen who wonder what currency to use when invoicing imports or exports. Indeed, the part that currencies play in world trade through their role in invoicing receives too little attention. Currently, the US dollar remains dominant. Most US exports and imports are denominated in dollars, and the dollar is extensively used in trade that does not involve America.

Since 1980, however, the dollar has lost ground. Estimates from the European Commission indicate that the dollar's share in world trade fell from 56% in 1980 to 52% in 1995 (the latest year for which statistics are available). The Deutsche Mark's share remained relatively unchanged between 1980 and 1995. The yen lags behind, but had the highest relative growth, with its share of world trade more than doubling from 2% in 1980 to almost 5% in 1995.

Among the reasons for the dollar's longtime dominance as the premier international currency are lower transactions costs in foreign exchange markets, the historical role of the dollar in world trade since 1945, and the sheer size of America's economy. But the role of size is more complex than it seems.