The dollar-based financial system through the window of the FX swaps market

Speech by Mr Hyun Song Shin, Economic Adviser and Head of Research at the BIS, at the Peterson Institute for International Economics conference on "Floating exchange rates at fifty", Washington DC, 24 March 2023.

The international role of the dollar is often discussed in terms of its role in national current accounts and foreign exchange reserves. But its central place in the global financial system is better seen through its role as the funding currency of choice for banks and non-banks in global capital markets. FX swaps and forwards play a crucial role for non-bank financial firms seeking to manage exchange rate risk in their asset portfolios. The outstanding obligations to repay dollars in FX swaps and forwards amount to more than $80 trillion, which is larger than the stocks of dollar treasury securities, repo and commercial paper combined. These sums are owed mainly by advanced economy entities rather than by those from emerging economies. Accounting conventions do not treat these dollar obligations as debt, but during times of dollar funding stresses, those facing dollar payment obligations are forced to join the scramble for dollars, exacerbating stress in capital markets. Central bank swap lines play a vital role in keeping global capital markets on an even keel. The dollar's importance in global affairs stems from this anchoring role for the financial system.