What would happen to the US dollar if the world switched to EUROs for all their financial transactions?

Question

We have one of the largest deficits in the world, especially with all the borrowing taking place from the Chinese. What would happen if the world (Like Iran today) dumped the dollar as the main currency?

Answer 1

Nothing. Paul Krugman once wrote a very good article on the subject:

http://www.pkarchive.org/trade/seignor.html

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Answer 2

That is a very good question. I guess nothing will really happen because of a dollar to euro switch per se. But the "million dollar" question is why would people do such a thing. It's there where the true risk lies. That is: if the world switches to euro because people don't like dollar's green color, I guess Americans can live with that and should not really care. If, however, they do change to euro because of mistrust on the American economy (e.g. large deficit), then its not the actual change that matters but something much deeper that has more to do with the weakness of the American economy. The change will not just be the result of a simple euro to dollar switch. It will rather reflect the fact that money (any) are now transfered from US to EU banks. This is what is happening right now. Slowly but steadily. And it is worrisome.
Now 1 euro = 1.42 dollars and keeps rising. Problems also arise for the European market as products become more and more expensive for the average American whereas Europeans start consuming more and more from the states. Isn't that what happened after the WWII in the states? The world was too cheap for Americans. Roles start switching back again...

Answer 3

Some argue that the American banking system would collapse. I disagree, as there is little preventing anyone from converting their dollars to euros now. Just because oil is a dollar-denominated transaction, the seller can convert his dollars to euros, yen, or rupees at will.

People keep dollars because they want to buy U.S. debt, stocks, real estate, or goods and services. Even if the rest of the world abandoned their currencies in favor of the euro, they would still have to buy dollars in order to buy anything in the U.S.