Finance

American dollar has been used as the world reserve currency for the better part of the century, where 70 percent of all currencies are reserved in form of dollars. This has contributed to the supremacy of the dollar in world trade and finances. The fact that oil which is of the most traded commodity in the world is only traded in dollars, most countries prefer dollars as their foreign currency reserve (Craig, Humpagee, 2007). The influence of the dollar could deteriorate if Irans proposal to price its oil in euro is accepted.
       
The U.S. economy which has been severely affected by economic, crunch largely depends on the high demand for the dollar to stay competitive. If the 2006 Irans proposal goes through, the euro would become a substitute oil trading currency. The deal would benefit many European countries thus loosening the role of the dollar in international trade (Boris, 2008).
       
There are several factors that have continually influenced the appreciation of the euro over the dollar since its launch. First is the economic magnitude and distribution. The bigger and more dynamic an economy is, the higher its global influence becomes in international trade. Since the EU has a larger population and a more open economy than America, the euro posses a big threat over the dollar (Farugee, 2006). Second, the price and the exchange rate of the euro has been more stable than that of the dollar. This creates confidence and makes investment in euro less risky.
       
Moreover, the growth and integration of the financial markets in Europe has strengthened over the years. This kind of a market increases the flow of cash, reduces transaction costs and lowers the rate of interest. In conclusion, a continued decline in portfolio inclination of U.S. assets will lead to the depreciation of the dollar and appreciation of the euro, thus increasing its use in international trade.