Currency competition between the dollar and euro: Evidence from exchange rate behaviors

- Investigate competition between the dollar and euro and its effects on exchange risk.
- Employ a simple distance metric that does not depend on the numeraire currency.
- Find evidence of increased influence of the euro on other currencies.
- Find evidence of increased exchange risk for dollar-based agents.

Using a simple numeraire currency-independent metric to measure distances between currencies, it is found that for most of the 25 sampled floating currencies, excluding the US dollar and euro, there has been a noticeable decrease in the ratio of a currency's distance from the euro to its distance from the dollar during the period from 1999 to 2013. Evidence that exchange risk has increased substantially is also found for dollar-based agents, while it has decreased for euro-based agents. Overall, the findings indicate that the influence of the euro, relative to the dollar, on other currencies has increased since its introduction.