Revisiting the international role of the US dollar

The international role of the US dollar (USD) is unrivalled. However, there is at times speculation that its role may be challenged. The reasons cited include China's growing role in the global economy, developments in technology (eg cryptoassets) or geopolitical considerations. This box provides an updated view of the international role of the USD, focusing mostly on its role in global financial markets.

The global FX market remains concentrated in a few currencies, with the USD dominating. The average turnover per day with the USD on one side of the transaction was $6.6 trillion – up 14% from $5.8 trillion in 2019 – in line with the change in total turnover. The USD was involved in nearly 90% of global FX transactions, making it the single most traded currency in the FX market (Graph A1). The dominance of the USD is evident across all FX instruments and counterparties. At least 85% of trading in the spot, forward and swap markets features the USD in one leg of the transactions.

Other currencies lag well behind (Graph A1). The euro – the second most traded currency – has a share of only 31%, down from its peak of 39% in 2010. A similar trend can be observed for the Japanese yen, while the British pound has maintained a largely constant share. The shift from these major currencies has been matched by a rise in the role of emerging market economy currencies such as the renminbi. The latter's share in global FX turnover has increased from less than 1% 20 years ago to more than 7% now (see Box A in Caballero et al, in this issue).

The USD's dominance in global FX markets is linked to several factors. First, its use as a vehicle currency for FX transactions, meaning that non-US dollar currency pairs are not exchanged directly but via the dollar. According to some estimates, this role of the USD drives just under 40% of its turnover in FX markets.

Second is the dollar's footprint in offshore funding markets, where financial market participants raise debt or obtain loans in foreign currency. About half of all international debt securities and cross-border loans issued in these offshore funding markets are denominated in USD (Graph A2, panel A). As of the second quarter of 2022, the amount of debt and loans denominated in USD where neither the issuer/borrower nor the lender is a US resident is estimated to be 88% of total international USD-denominated debt and 65% of total international USD bank loans (Graph A2, panel A).

Third is the currency's popularity in international trade and global payments. Approximately half of global trade is invoiced in USD, although this share varies widely across regions (Graph A2, panel A).

This disproportionately large reliance on the USD is in spite of the United States accounting for just over a 10th of global trade. These shares have hardly changed since 2019 (see CGFS (2020)).

One area where the role of the USD has been shrinking to some degree is official foreign exchange reserves, even though it remains the foremost reserve currency. As of the second quarter of 2022, the USD accounted for less than 60% of official foreign exchange reserves (Graph A2, panel B). This is one of the lowest shares in the past 20 years and is well below the average of 65% for the period.

The views expressed are those of the authors and do not necessarily reflect those of the Bank for International Settlements Congressional Research Service, 15 September 2022. For the US dollar as the world's dominant reserve currency, see L Goldberg, R Lerman and D Reichgott, "The U.S. dollar's global roles: revisiting where things stand", Federal Reserve Bank of New York, Liberty Street Economics, 5 July 2022. F Somogyi, "Dollar dominance in FX trading", University of St. Gallen, School of Finance Research Paper, no 2021/15. The share of USD in trade invoicing is estimated to be higher in the Americas, but lower in Europe where trade invoicing is predominantly done in euros: see C Bertaut, C von Beschwitz and S Curcuru, "The international role of the U.S. dollar", Washington: Board of Governors of the Federal Reserve System, FEDS Notes, 6 October 2021. Committee on the Global Financial System, "US dollar funding: an international perspective", CGFS Papers, no 65, June 2020.