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February15,2024
TheDollar’sInternationalRole
Remarksby
ChristopherJ.Waller
Member
BoardofGovernorsoftheFederalReserveSystem
at
“Climate,Currency,andCentralBanking,”aconferencesponsoredbytheGlobalInterdependenceCenterandtheUniversityoftheBahamas
Nassau,Bahamas
February15,2024
ThankyoutotheGlobalInterdependenceCenterfortheinvitationtospeaktoyou
today.1MysubjectistheU.S.dollar’sprimacyinglobalfinanceandtheglobal
economy,whichsomefeelisunderthreatasneverbefore.Oneheadlineasserts:“WhytheDollar’sReignIsNearanEnd.”Actually,itturnsoutthisthreatisn’tsonew.That
headlinewasfrom2011.2Itistemptingtowriteoffconcernsaboutthedollar’sstatus
thatneverseemtocometopass,butIdon’tdismissthem.TheroleoftheUnitedStatesintheworldeconomyischanging,financeisalwayschanging,andIthinkitisimportantforpolicymakerstoregularlyconsiderifandwhythedollar’srolemightchangeaswell.
That’swhatIaimtodointheseremarks.
Whenpeoplerefertothedollaranditsreservecurrencystatus,theytypicallymix
togetheravarietyofrolesthatitplaysontheworldstage.SoIwouldliketostartby
clarifyingthesemanyroles.First,theterm“dollar”oftenreferstophysicalU.S.currencyanditsusearoundtheworld.However,incertaincontexts,itisusedtodescribefinancialassets,suchasU.S.Treasurysecurities,thataredenominatedinandpromiseredemptioninU.S.dollars.Finally,theword“dollar”isusedtodescribeitsuseasthesettlementunit
ofaccountininternationaltransactions.Iwillusetheword“dollar”throughoutthis
speechtorefertothesevariousconcepts,andIhopeitwillbeclearwhichoneIam
referringtoasIspeak.
Formanydecades,theU.S.dollarhashadanoutsizedroleintheglobaleconomy,supportedbythesizeandstrengthoftheU.S.economy,itsstabilityandopennesstotrade
andcapitalflows,andstrongpropertyrightsandruleoflaw.Thedollar’sinternational
1TheviewsexpressedherearemyownandarenotnecessarilythoseofmycolleaguesontheFederalOpenMarketCommittee.IwouldliketothankCarolBertaut,StephanieCurcuru,andJustinPiercefortheir
supportinpreparingthistext.
2SeeEichengreen(2011).
-2-
rolehasclearbenefitsfortheUnitedStates,loweringtransactionandborrowingcostsfor
U.S.households,businesses,andgovernmentandwideningthepoolofcreditorsand
investors.ThewidespreaduseofthedollarcanhelpinsulatetheU.S.economyfrom
shocksfromabroad.
Therestoftheworldalsobenefitsfromthedollar’sinternationalrole.Thedollar
servesasasafe,stable,anddependableformofmoneyaroundtheworld.Itservesasa
reliablecommondenominatorforglobaltradeandadependablesettlementinstrumentfor
cross-borderpayments.Indoingso,itreducescostsofengagingininternational
transactionsforhouseholdsandbusinessesincludingthoseoutsideoftheUnitedStates.
RecentcommentarywarningofapossibledeclineinthestatusoftheU.S.dollar
raisesconcernsabouttheeffectsofsanctionsagainstRussia,U.S.politicaldysfunction,
theriseofdigitalassets,andChina’seffortstobolsterusageoftherenminbi.Other
commentaryhaswarnedof“geoeconomicfragmentation”andwhethertradeand
financialflowscouldrealigninwaysthatadverselyaffectthedollar’soutsizedrole.
Againstthisbackdrop,it’susefultoreviewwhethertherehasbeenanychangeinhowthe
dollarstacksupagainstthestandardmeasuresbywhichweassessacurrency’s
acceptanceasaninternationalcurrency.
Acceptanceasan“internationalcurrency”istypicallyassessedalongthree
dimensions:itsuseasastoreofvalue,asamediumofexchange,andasaunitof
account.Alarmistheadlinesnotwithstanding,thedollarcontinuestodominateinallthree
ofthesemeasures,andgenerallybyalargemargincomparedwithanyothercurrency.3
3SeeMaggiori,Neiman,andSchreger(2019).
-3-
The“storeofvalue”dimensionrelatestotheabilitytosaveinagivencurrency
andretrievethosesavingsinthefuturewithoutasignificantexpectedlossofpurchasing
power.Akeymeasureoftheconfidenceinacurrencyasastoreofvalueisitsusein
officialforeignexchangereserves.Atalmost60percentofglobalreservesin2022,theU.S.dollarisbyfarthedominantreservecurrency.4Thenextleadingcompetitortothedollaristheeuro,withashareofroughly20percent.Althoughsomehavepointedtoa
decreasingshareofreservesheldindollars,thedollarshare—thoughdownsomewhat
fromthemid-2000s—isactuallylittlechangedfromthemid-1990s.Andwhiletherehasbeenanincreaseintheshareheldinrenminbi,thatshareistrivialatabout2percent.To
theextentthattherehasbeengradualdiversificationinreservessincethemid-2000s,it
hasbeenintoawiderangeofothercurrencies,suchasCanadianandAustraliandollars.
ThemajorityofglobaldollarreservesareheldinU.S.Treasurysecurities,with
thedepthandliquidityoftheU.S.Treasurymarketreinforcingthedesirabilityofthe
dollarasastoreofvalue.Currently,foreigninvestorsholdaboutone-thirdofTreasury
securitiesoutstanding.Therehasbeenasteadydeclineinthisshare:Foreigninvestors
heldroughlyhalfofTreasurysecuritiesoutstanding10yearsago.Amajorreasonforthe
decline,however,isthatoverthepastdecade,thestockofglobalforeignexchange
reserveshasgrownmuchmoreslowlythanthestockofTreasurysecuritiesoutstanding,soforeignofficialinvestorsareaccountingforadecliningshare.Foreignprivateinvestor
demandforU.S.Treasurysecurities,bycontrast,hasbeensustainedandhaskeptpace
withtheincreasedissuanceinrecentyears.Theroughlyone-thirdofTreasurysecurities
currentlyheldbyallforeigninvestorsisnowbroadlycomparablewithsharesof
4SeeBertaut,vonBeschwitz,andCurcuru(2023).
-4-
sovereigndebtheldbyforeigninvestorsintheeuroarea,theU.K.,andJapan.5TheU.S.
benefitsfromforeigndemandforU.S.Treasurysecuritiessinceitbidsupthepriceof
suchsecurities,therebyloweringtheinterestexpensepaidonTreasurydebt.
Anotherwaytolookatthedollarasastoreofvaluefortheglobalfinancial
systemisthedemandforU.S.dollarbanknotesabroad.Determiningexactlyhowmuchcurrencyisheldabroadischallenging,butresearchsuggeststhatforeigninvestorsholdroughlyhalfofthedollarvalueofU.S.banknotesoutstanding.6Thisshareissimilarto
orabithigherthanforeurobanknotes,whererecentresearchestimatessuggestthat
between30and50percentofeurobanknotesareheldabroad,primarilyincountriesthataregeographicallyclosetotheeuroarea.7“Dollarization”or“partialdollarization”isaglobalphenomenonthatreferstotheuseofdollarsinforeigncountriesasasubstitutefor
thedomesticcurrency.
Typically,thispracticeoccursbecauseofpersistentlyhighdomesticinflation.Whileforeigncitizensarefreetouseanyothercurrencyissuedaroundtheworld,the
dollaristheoverwhelmingchoiceforcitizensinthesecountries.Fulfillingforeign
demandforU.S.currencyallowsustoearnseigniorageonbanknotesheldabroad.
So,bystore-of-valuemeasures,thedollarremainsthemostwidelyusedcurrency,
thoughitsdominancemayhaveedgeddownslightlyoverthepastcoupledecades.
Thedollar’sattractivenesstoprivateinvestorsandbusinessesisespecially
apparentinitsroleasamediumofexchange—thatis,initsuseintradeinvoicing,global
banking,internationaldebtissuance,andforeignexchangetransactions.
5SeeBertaut,vonBeschwitz,andCurcuru(2023).
6SeeBertaut,vonBeschwitz,andCurcuru(2023).
7SeeLalouetteandothers(2021).
-5-
Tostartwithtradeinvoicing,thedollarisbyfarthedominantcurrency.Trade
invoicingindollarsmeansthatthetermsofthecontractarespecifiedinunitsofthedollarandthedollaristhesettlementobjectforthetrade.Dollarinvoicingaccountsforatleastthree-fourthsofexportinvoicinginallregions,exceptinEurope,andover96percentin
theAmericas.Notsurprisingly,theeuroisthedominantinvoicingcurrencyinEurope,
buteventhere,theeuroshareisonlyabout50percentonceintra-euro-areatradeis
excluded.8DollardominanceonthisdimensionhasmajorbenefitsforU.S.firms,asitremovesexchangerateriskandeliminatestheneedforcomplicatedandcostlyhedging
strategieswhentheyengageininternationaltrade.
Invoicingdominanceislinkedtoasimilarlydominantroleininternational
bankinganddebtissuance.About60percentofinternationalbankingloansanddeposits
aredenominatedinU.S.dollars.Forinternationaldebtsecurities,about70percentof
bondsissuedinacurrencyotherthantheissuer’shomecountrycurrencyare
denominatedinU.S.dollars.9Theseshareshavebeenquitestableoverthepast10to15
years.DollardominanceininternationalbankinghasbenefitsforU.S.householdsand
businesses,sinceitmeansthatforeignbankshavestrongconnectionstotheU.S.
financialsystem,increasingtheamountofcreditavailableintheU.S.andloweringthe
costofborrowing.Fordebtsecurities,dollardominancemeansthatwhenU.S.firms
issuedebtinmarketsoutsidetheUnitedStates,theycanissueindollarsanddon’thaveto
bearexchangeraterisk.AndU.S.investorscangetexposuretoforeignfirmswithout
incurringexchangeraterisk.
8SeeBertaut,vonBeschwitz,andCurcuru(2023).
9SeeBertaut,vonBeschwitz,andCurcuru(2023).
-6-
ThemanysourcesofdemandforU.S.dollarsshowthroughtoitsveryhighshare
offoreignexchangetransactions,where,accordingtothelateststatisticsfromtheBank
forInternationalSettlements,thedollarremainsbyfarthemostcommonlytraded
currency.10Thesizeanddepthofdollarforeignexchangemarketsmeanthedollaris
frequentlyusedasa“vehicle”currency:Evenwhenfirmsandinvestorsaroundtheglobewanttotransactintwocurrenciesthatdon’tincludethedollar,theytypicallyfindthatit
iseasierandlessexpensivetofirstconductatradebetweentheinitialcurrencyandthe
dollarandthenconductasecondtradetoexchangethedollarsforthesecondcurrency.11
Thefinalroleforaninternationalcurrencyisasaunitofaccount,andan
importantmeasureonthisdimensionisitsuseasan“anchorcurrency”againstwhich
othercountriesmayattempttolimittheirexchangeratemovements.Here,theresearchfindsthatthedollar’susageasananchorcurrencyhasincreasedsomewhatoverthepast
twodecades.NotincludingtheU.S.,economiesanchoredtothedollaraccountedfor
roughly50percentofworldgrossdomesticproduct(GDP)by2015.Bycontrast,the
shareofworldGDPanchoredtotheeurowasonly5percent(notcountingtheeuroarea
itself).12
Torecap,bystandardmeasuresofaninternationalcurrency’suse,therehasnot
beenanynotableerosioninthedollar’sdominanceoverthepastcoupleofdecades.
Goingforward,however,therearepotentialchallengestothedollar’sinternationalstatus,
andsomerecentdevelopmentshavethepotentialtoboosttheinternationaluseofother
currencies.
10SeeBankforInternationalSettlements(2022).
11SeeDevereuxandShi(2013).
12SeeIlzetzkietal.(2019).
-7-
Ashiftingpaymentslandscape—forexample,therapidgrowthofdigital
currencies—couldreducerelianceontheU.S.dollar.Peopleoftenconjecturethat
cryptocurrencieslikeBitcoinmayreplacetheU.S.dollarastheworld’sreservecurrency.Butmosttradingindecentralizedfinance(DeFi)involvetradesusingstablecoins,which
linktheirvalueone-for-onetotheU.S.dollar.About99percentofstablecoinmarket
capitalizationislinkedtotheU.S.dollar,meaningthatcrypto-assetsaredefactotraded
inU.S.dollars.SoitislikelythatanyexpansionoftradingintheDeFiworldwillsimply
strengthenthedominantroleofthedollar.
Asecondpotentialchallengetothedollarcouldbeincreasedprominenceoftheeuro,thesecondmostwidelyusedinternationalcurrency.LiketheU.S.,theEuropeanUnion(EU)isalargeeconomywithfairlydeepfinancialmarkets,generallyfreetrade,androbustandstableinstitutions.Wideruseoftheeuroasareservecurrencymayhave
beenheldbackbythelackofadeepandliquidmarketforEUdebt,thoughtherehave
beensomenotablerecentdevelopments.DuringtheCOVID-19crisis,theEUissuedanunprecedentedamountofjointlybackeddebt,reachingaboutEUR400billionbyMay2023.WhilethisisanoteworthydevelopmentfortheEU,thisamountistinycompared
withthe$24trillionoutstandinginU.S.Treasurysecurities.13
ThecontinuedrapidgrowthofChinaandChineseeffortstoboosttheuseoftheircurrencycouldmaketheChineserenminbiamoreattractivecompetitortothedollarandincreaseitsinternationaluse.Severalfactorscurrentlyweighagainsttherenminbiasan
attractiveassetforinternationalinvestors:Itisnotfreelyexchangeable,theChinese
capitalaccountisnotopen,andinvestorconfidenceinChineseinstitutionsisrelatively
13SeeBertaut,vonBeschwitz,andCurcuru(2023).
-8-
low.RecentendeavorsbyChinatoovercometheseshortcomingsincludeincreased
effortstopromoterenminbiinvoicing.Forexample,itreachedanagreementwithBraziltoallowChineseandBraziliancompaniestosettletradeintheirdomesticcurrenciesand
hasbeenindiscussionwithSaudiArabiatopotentiallypriceoiltradeinrenminbi.
However,outsideanalystsgenerallyviewtheseagreementsassymbolicandatmost
layingthegroundworkforpotentialfutureuseoftheChineserenminbiinveryisolated
instances.
SomecommentatorshavealsoarguedthatsanctionsimposedbytheUnitedStates
anditsalliesonRussiafollowingtheinvasionofUkrainecouldmakethedollarless
attractiveasareservecurrencyfortheUnitedStates’sgeopoliticaladversaries.In
practice,however,U.S.adversarieshavefewpracticalalternativestothedollar,asotherprominentreservecurrencies—suchastheeuro,Japaneseyen,andBritishpound—areall
issuedbycloseU.S.allies,whoalsoparticipatedinsanctionsonRussia.
Moregenerally,someworrythatthedollar’srolecouldbethreatenedbyamovetowardso-calledgeoeconomicfragmentation,inwhichtradeandfinancialflowsrealign
andbecomerestrictedwithinblocsofalliedcountries.Theformationofablocthat
excludestheU.S.—orevenexplicitlyseekstocountertheUnitedStates’roleintheglobaleconomy—couldmakesomecountrieslesslikelytodenominateinternational
transactionsindollars.
Thisscenariosoundsalarming,butthusfar,trendsthatappearconsistentwith
fragmentationlargelycanbeexplainedbyspecificpolicyactions.Oneexampleisthe
dramaticreallocationofU.S.–Chinatradeinrecentyears,asfirmsineachcountry
decreaserelianceonimportssourcedfromtheother.Whilethisshifthascoincidedwith
-9-
aperiodofheightenedgeopoliticaltensions,theevidencesuggestsasimplerexplanation:
firmsrespondingtochangesinrelativeprices,inthiscasecausedbytheimpositionof
reciprocaltariffsbythetwocountriessince2018.Forexample,whileU.S.importsoftariff-affectedgoodsfromChinahaveplunged,importsofgoodsnotsubjecttotariffshavecontinuedtorise.14Despitethereallocationoftradeflowsacrosscountries,atthe
endoftheday,thosetradeflowscontinuetobeinvoicedmainlyindollars.
Afinalconsiderationregardingtheinternationaluseofthedollarrelatesto
financialstabilityconcerns.Intimesofglobalfinancialstress,investorsand
governmentsseekasafehaventoprotectthevalueoftheirassetsandstabilizetheirownfinancialmarkets.Whenthishappens,thereisalmostalwaysa“flighttothedollar”andheighteneddemandforU.S.dollarassets.Wesawthisin2008andagainin2020.ThisistheultimatevindicationthattheU.S.dollaristheworld’sreservecurrencyandislikely
toremainso—intimesofglobalstress,theworldrunstothedollar,notawayfromit.
Toconclude,forthereasonsIhavelaidouthere,IdonotexpecttoseetheU.S.
dollarloseitsstatusastheworld’sreservecurrencyanytimesoon,norevenseea
significantdeclineinitsprimacyintradeandfinance.Recentdevelopmentsthatsome
havewarnedcouldthreatenthatstatushave,ifanything,strengthenedit,atleastsofar.
14SeeBown(2022).
-10-
References
Alfaro,Laura,andDavinChor(2023).“GlobalSupplyChains:TheLooming‘GreatReallocation,’”NBERWorkingPaperSeries31661.Cambridge,Mass.:
NationalBureauofEconomicResearch,September,
/papers/w31661.
BankforInternationalSettlements(2022).TriennialCentralBankSurveyofForeign
ExchangeandOver-the-CounterDerivativesMarkets.Basel,Switzerland:BIS,October,
/statistics/rpfx22.htm.
Bertaut,Carol,Bastia
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