Ken Rogoff asks, "Has the moment come to replace the dollar?" His answer is: "Maybe not quite yet....but soon." (His article, which I came across on Real Clear Markets, is for Project Syndicate, but it seems to have been posted in the The Daily Star of Lebanon, of all places, before it is available there.)
At current market exchange rates, the European Union is now larger economically than the US. New central and eastern European members are bringing enormous dynamism and flexibility. At the same time, the European Central Bank has gained considerable credibility from its handling of the global credit crisis. Indeed, if the euro zone can persuade Great Britain to become a full-fledged member, thereby acquiring one of the world's two premier financial centers (London), the euro might start to look like a viable alternative to the dollar.
In 1971, as the dollar collapsed towards the end of the post-World War II fixed exchange-rate system, US Treasury Secretary John Connally famously told his foreign counterparts that "the dollar is our currency, but your problem." And the dollar's exalted global status has survived ever since, despite many episodes of neglect and abuse.
World currency standards have enormous inertia. The British pound only forfeited its role to the US dollar after more than 50 years of industrial decline and two world wars. But it could happen a lot faster this time. As central bankers and finance ministers ponder how to intervene to prop up the dollar, they should also start thinking about what to do when the time comes to pull the plug.
I did a piece on the same subject for The Atlantic last May. The article goes into some of the advantages that the US has derived from the dollar's reserve-currency status, and what is at stake if that should change.
The dollar’s status as the global currency confers more advantages on the United States and its citizens than you might think—advantages far beyond convenience for international travelers (though let us not underestimate that). The dollar’s popularity has moved real resources from the rest of the world to the United States. And on a much larger scale, through an economic sleight of hand in global financial markets, it has allowed the country to sustain an otherwise impossible standard of living. These wonderful tricks, unfortunately, may not work much longer. When they start to fail, as they eventually must, the dollar’s peculiar global role will suddenly become a focus of attention. You don’t know what you’ve got till it’s gone.