The under-theorisation of dollar dominance

The recent period has seen an upsurge in predictions that the dollar's international dominance will soon be challenged by a rival currency, with the euro currently tipped as the leading contender. This paper counters these predictions. It argues that the overestimation of the euro's ability to challenge dollar dominance comes down to the under-theorisation of the foundations of that dominance, the root problem in this context being macroeconomic theories' tradition of taking the household investor to be the representative investor when it should in reality be an institutional investor. It is well known that the dollar's current dominance rests heavily on the substantial size of the US' capital market and on the substantial involvement of foreign investors in that market but if financial securities are viewed through the lens of the household investor, it then follows that there is nothing preventing a foreign exodus from the US such as will reduce its capital market to a size comparable with the eurozone market thereby enabling the euro to rival the dollar. On the contrary, if financial securities are viewed through the lens of the institutional investor it then becomes clear that there can be no exodus from the US capital market on the scale necessary for undermining the dollar's dominance because it then becomes clear that foreign investors remain strongly attracted to this market for reasons as much to do with its mass and consequent gravitational pull as to do with a shortage of securities that can be supplied by other capital markets including that of the eurozone.