The US dollar has enjoyed a dominant position for almost 30 years. Our paper, Exploring the history of dollar dominance, looks at how the dollar cemented its position since the second world war. This paper focuses on the dollar’s current role in world financial markets.
Dollar use remains high everywhere, with the euro a clear second
Persistent talk of a shift away from the dollar recalls historian AJP Taylor’s comment on the 1848 revolution as a “turning point that did not turn.” Here too, little has changed in recent years. Despite America’s twin deficits, rising national debt levels, a turbulent domestic political environment and disruptive foreign policy, dollar use remains exceptionally wide and deep. In trade invoicing,1 international banking and corporate borrowing,2 simple foreign exchange turnover,3 central bank reserves4 and other measures of currency dominance, the dollar reigns supreme. In short:
- As a store of value, nearly two-thirds of international debt markets are denominated in dollars, as are nearly three-fifths of cross-border loans.5 Meanwhile, 63% of international currency reserves are denominated in dollars.
- As a means of payment, 40% of all payments are denominated in dollars, as is 44% of foreign exchange turnover.
- As a unit of account, petroleum prices are mostly set in dollars, while other commodity prices are quoted in dollars. Moreover, 80% of dollar-denominated imports never enter the US. By contrast, all trade using euros involves at least one euro-zone country.6
Snapshot of the international monetary system
Sources: BIS, IMF, SWIFT, ECB, and Gita Gopinath. Data as of the fourth quarter of 2017 or latest available. Empty columns imply unavailable data or negligible values.
Even though the euro’s share of reserves has increased in recent years, fuller internationalisation of the euro requires overcoming an export-driven growth model championed by the euro zone’s anchor economy, Germany, that discourages large currency inflows. It involves changing a financial and legal order that prevents the creation of the required supply of safe assets and going beyond a pure inflation-targeting mandate that prevents the European Central Bank from assuming wider international responsibilities, such as extending swap lines during crises.7
Domestic and international payments by currency share
Sources: SWIFT, 2018
The renminbi remains limited as a global currency
As China’s economic might grows, there is increasing focus on the potential of the renminbi to achieve global currency status. Despite Chinese efforts after the global financial crisis to expand the renminbi’s use, progress has stalled. This stagnation occurred after the bout of volatility in late 2015/early 2016, when China’s stabilisation efforts involved re-closing the capital account to domestic investors.
Today, the renminbi remains limited as a global currency. As a medium of exchange, renminbi use in domestic and international payments fell a whole percentage point between 2016 and 2018 to 1.7%. Even the Canadian dollar is more widely used.8 As a store of value, renminbi assets held by overseas institutions within China finally returned to the levels seen at the beginning of 2015 in renminbi terms, implying a reduction relative to the larger size of the economy.9 True, renminbi use in sovereign reserves rose to 1.84% in mid-2018 from 1.07% at the end of 2016, but that is from a relatively low base.10
Why there is no alternative to the dollar on the world stage:
Emerging Asian economies are always looking for ways to reduce the boom-and-bust cycle associated with the dollar.
Despite these longstanding advantages, could de-dollarisation gain momentum in the next cycle?
2018 was potentially a watershed year in which countries in the path of sanctions, like Russia, Iran and to some extent China and the EU, began to accelerate ways to protect themselves from the consequences of using the dollar. President Trump’s sanctions are a proximate but not an ultimate cause for the shift.
Meanwhile, other emerging Asian economies are always looking for ways to reduce the boom-and-bust cycle associated with the dollar, and they may get that opportunity as trade in Asia becomes less dependent on the US. Currently, for instance, a 10% US dollar appreciation takes about 1.5 percentage points off GDP growth in emerging market economies.16 Such countries therefore may find it to their advantage to sign swap agreements with the Chinese central bank and conduct trade in a currency like the renminbi, which increasingly reflects their trade patterns. Besides geopolitical shifts, changes in energy market dynamics, structural shifts in China and a dollar down cycle could see de-dollarisation gathering pace over the next few years. We explore these dynamics in more detail in our paper, What is driving de-dollarisation?
1 Gopinath, G., and Stein, J. “Banking, Trade and the Making of a Dominant Currency,” 29 November 2018, Joint European Central Bank / Federal Reserve Board and the Federal Reserve Bank of New York Conference, 30 November 2018.
2 Smith, C., “One more reminder that the US dollar is dominant,” Financial Times, 5 September 2018.
3 Triennial Central Bank Survey of foreign exchange and OTC derivatives markets in 2016, Bank for International Settlements, 11 December 2016, Table D11.1.
4 Currency Composition of Official Foreign Exchange Reserves, International Monetary Fund data.
5 BIS Statistics Explorer, Table C3, All Countries excluding residents, Issue Currency.
and “The international role of the euro,” Interim Report, European Central Bank, June 2018.
6 Gopinath, G., “The International Price System,” Harvard University and NBER, 2 November 2015.
7 Tooze, A., Odendahl, C., “Can the euro rival the dollar?” Centre for European Reform, 4 December 2018.
8 “RMB Tracker: Monthly reporting and statistics on renminbi (RMB) progress towards becoming an international currency,” SWIFT.
9 Herrero, A.G., Xu, J., Chen, K., “Natixis RMB Internationalization Monitor: Stagnation” Natixis, May 2018, p. 14.
10 Currency Composition of Official Foreign Exchange Reserves, International Monetary Fund data.
11 Boz, E., Gopinath, G., and Plagborg-Moller, M., “Global trade and the dollar,” Voxeu, 11 February 2018.
12 Clement, D., “Interview with Gita Gopinath,” The Region, Federal Reserve Bank of Minneapolis, 20 December 2016.
13 Eichengreen, B., Mehl, A., Chitu, L.,” Mars or Mercury? The geopolitics of international currency choice,” Voxeu, 2 January 2018.
14 Bernanke, B., “The dollar’s international role: An ‘exorbitant privilege’?” Brookings Institute, 7 January 2016.
15 Tooze, A., Odendahl, C., “Can the euro rival the dollar?” Centre for European Reform, 4 December 2018.
16 Martin, F.E., Mukhopdhyay, M., and Hombeeck, C., “The global role of the US dollar and its consequences,” Quarterly Bulletin, Bank of England, Fourth Quarter 2017, p.1.
*Other contributing authors
Greg Kuhnert | Peter Eerdmans | Michael Spinks | John Stopford | Iain Cunningham | Wilfred Wee | Tom Nelson | Michael Power | Imran Ahmed
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