The writer is professor of economics at London Business School and vice-president of the Centre for Economic Policy Research
The policy unpredictability of the Trump administration has accelerated questioning of the long-term viability of the dollar’s hegemonic status. This will have significant implications for the euro, the second most traded currency globally. More demand for the euro will bring benefits to Europe but also risks which need to be addressed.
Firstly though, two distinct concepts are often conflated when analysing the dollar: its role as the world’s dominant international currency and its exchange rate. In fact, these are different economic phenomena. The dollar has served as the global reserve currency since at least 1944, but its relative strength has fluctuated significantly since the adoption of floating exchange rates in 1973 — hardly evidence of a structurally overvalued currency.