International Currency: Dollar, Euro or IMF's SDR

BACKGROUND INFORMATION:

The U.S. Dollar has been a very popular currency to hold worldwide as it has had a reputation for being stable and is accepted in exchange for goods and services in most corners of the globe. However, on January 1st, 1999 the European Union introduced the Euro, which has been accepted as the main currency in a growing number of European countries including Germany, France, Italy, Spain, Greece etc.. As a further challenge to the dominance of the USD China has started pressing to replace the USD as the world's reserve currency with the International Monetary Fund's (IMF) Special Drawing Rights as well as the World Bank's suggestion that the dollar should once again be linked to gold. Lately the Chinese have started proting their own currency too.

Is the exchange rate (the dollar price of the Euro) determined by a fixed or a floating exchange rate system? Is the exchange rate of the Mexican peso in terms of Euro determined in a fixed or in a floating exchange rate system? What about the IMF's Special Drawing Rights: How is their value determined? What about the large amount of money being printed by the Federal Reserve and the huge deficits being created by the US administration? What about the deficit/debt problems of the "Club Med" countries and the effect these problems are having on the value of the euro?

ASSIGNMENT:

Will the Euro and/or the IMF's Special Drawing Rights or a gold linked dollar or a select basket of currencies replace the US Dollar as the world's most popular currency to hold? Consider the implications being introduced by the debt problems in Europe on the exchange rates between the U.S. dollar, the euro and the other major world currencies.

Assignment Expectations:

A paper detailing why the US dollar might be replaced as the world's reserve currency by the Euro or the IMF's Special Drawing Rights.