For release on delivery
1:15 p.m. EST
February 15, 2024
The Dollar's International Role
Remarks by
Christopher J. Waller
Member
Board of Governors of the Federal Reserve System
at
"Climate, Currency, and Central Banking," a conference sponsored by
the Global Interdependence Center and the University of the Bahamas
Nassau, Bahamas
February 15, 2024
Thank you to the Global Interdependence Center for the invitation to speak to you
My subject is the U.S. dollar's primacy in global finance and the global
today.1
"Why
economy, which some feel is under threat as never before. One headline asserts:
the Dollar's Reign Is Near an End." Actually, it turns out this threat isn't so new. That
about the dollar's status
headline was from 2011.2 It is tempting to write off concerns
but I don't dismiss
that never seem to come to pass, them. The role of the United States
in the world economy is changing, finance is always changing, and I think it is important
why the dollar's role might change as well.
for policymakers to regularly consider if and
That's what I aim to do in these remarks.
When people refer to the dollar and its reserve currency status, they typically mix
together a variety of roles that it plays on the world stage. So I would like to start by
clarifying these many roles. First, the term "dollar" often refers to physical U.S. currency
and its use around the world. However, in certain contexts, it is used to describe financial
assets, such as U.S. Treasury securities, that are denominated in and promise redemption
in U.S. dollars. Finally, the word "dollar" is used to describe its use as the settlement unit
of account in international transactions. I will use the word "dollar" throughout this
speech to refer to these various concepts, and I hope it will be clear which one I am
referring to as I speak.
For many decades, the U.S. dollar has had an outsized role in the global economy,
supported by the size and strength of the U.S. economy, its stability and openness to trade
and capital flows, and strong property rights and rule of law. The dollar's international
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role has clear benefits for the United States, lowering transaction and borrowing costs for
U.S. households, businesses, and government and widening the pool of creditors and
investors. The widespread use of the dollar can help insulate the U.S. economy from
shocks from abroad.
The rest of the world also benefits from the dollar's international role.
The dollar
serves as a safe, stable, and dependable form of money around the world. It serves as a
reliable common denominator for global trade and a dependable settlement instrument for
cross-border payments. In doing so, it reduces costs of engaging in international
transactions for households and businesses including those outside of the United States.
Recent commentary warning of a possible decline in the status of the U.S. dollar
raises concerns about the effects of sanctions against Russia, U.S. political dysfunction,
the rise of digital assets, and China's efforts to bolster usage of the renminbi. Other
of "geoeconomic fragmentation" and whether trade and
commentary has warned
financial flows could realign in ways that adversely affect the dollar's outsized role.
Against this backdrop, it's useful to review whether there has been any change in how
the
dollar stacks up against the standard measures by which we assess a currency's
acceptance as an international currency.
an "international currency" is typically assessed along three
Acceptance as
dimensions: its use as a store of value, as a medium of exchange, and as a unit of
account. Alarmist headlines notwithstanding, the dollar continues to dominate in all three
of these measures, and generally by a large margin compared with any other currency.3
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The "store of value" dimension relates to the ability to save in a given currency
and retrieve those savings in the future without a significant expected loss of purchasing
power. A key measure of the confidence in a currency as a store of value is its use in
official foreign exchange reserves. At almost 60 percent of global reserves in 2022, the
U.S. dollar is by far the dominant reserve currency.4 The next leading competitor to the
dollar is the euro, with a share of roughly 20 percent. Although some have pointed to a
decreasing share of reserves held in dollars, the dollar share-though down somewhat
from the mid-2000s-is actually little changed from the mid-1990s. And while there has
been an increase in the share held in renminbi, that share is trivial at about 2 percent. To
the extent that there has been gradual diversification in reserves since the mid-2000s, it
has been into a wide range of other currencies, such as Canadian and Australian dollars.
The majority of global dollar reserves are held in U.S. Treasury securities, with
the depth and liquidity of the U.S. Treasury market reinforcing the desirability of the
dollar as a store of value. Currently, foreign investors hold about one-third of Treasury
securities outstanding. There has been a steady decline in this share: Foreign investors
held roughly half of Treasury securities outstanding 10 years ago. A major reason for the
decline, however, is that over the past decade, the stock of global foreign exchange
reserves has grown much more slowly than the stock of Treasury securities outstanding,
so foreign official investors are accounting for a declining share. Foreign private investor
demand for U.S. Treasury securities, by contrast, has been sustained and has kept pace
with the increased issuance in recent years. The roughly one-third of Treasury securities
currently held by all foreign investors is now broadly comparable with shares of
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sovereign debt held by foreign investors in the euro area, the U.K., and Japan.5 The U.S.
benefits from foreign demand for U.S. Treasury securities since it bids up the price of
such securities, thereby lowering the interest expense paid on Treasury debt.
Another way to look at the dollar as a store of value for the global financial
system is the demand for U.S. dollar banknotes abroad. Determining exactly how much
currency is held abroad is challenging, but research suggests that foreign investors hold
roughly half of the dollar value of U.S. banknotes outstanding.6 This share is similar to
or a bit higher than for euro banknotes, where recent research estimates suggest that
between 30 and 50 percent of euro banknotes are held abroad, primarily in countries that
are geographically close to the euro area.7 "Dollarization" or "partial dollarization" is a
global phenomenon that refers to the use of dollars in foreign countries as a substitute for
the domestic currency.
Typically, this practice occurs because of persistently high domestic inflation.
While foreign citizens are free to use any other currency issued around the world, the
dollar is the overwhelming choice for citizens in these countries. Fulfilling foreign
demand for U.S. currency allows us to earn seigniorage on banknotes held abroad.
So, by store-of-value measures, the dollar remains the most widely used currency,
though its dominance may have edged down slightly over the past couple decades.
The dollar's attractiveness to private investors and businesses is especially
apparent in its role as a medium of exchange-that is, in its use in trade invoicing, global
banking, international debt issuance, and foreign exchange transactions.
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To start with trade invoicing, the dollar is by far the dominant currency. Trade
invoicing in dollars means that the terms of the contract are specified in units of the dollar
and the dollar is the settlement object for the trade. Dollar invoicing accounts for at least
three-fourths of export invoicing in all regions, except in Europe, and over 96 percent in
the Americas. Not surprisingly, the euro is the dominant invoicing currency in Europe,
but even there, the euro share is only about 50 percent once intra-euro-area trade is
excluded.8 Dollar dominance on this dimension has major benefits for U.S. firms, as it
removes exchange rate risk and eliminates the need for complicated and costly hedging
strategies when they engage in international trade.
Invoicing dominance is linked to a similarly dominant role in international
banking and debt issuance. About 60 percent of international banking loans and deposits
are denominated in U.S. dollars. For international debt securities, about 70 percent of
issued in a currency other than the issuer's home country
bonds currency are
denominated in U.S. dollars.9 These shares have been quite stable over the past 10 to 15
years. Dollar dominance in international banking has benefits for U.S. households and
businesses, since it means that foreign banks have strong connections to the U.S.
financial system, increasing the amount of credit available in the U.S. and lowering the
cost of borrowing. For debt securities, dollar dominance means that when U.S. firms
issue debt in markets outside the United States, they can issue in dollars and don't have to
bear exchange rate risk. And U.S. investors can get exposure to foreign firms without
incurring exchange rate risk.
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The many sources of demand for U.S. dollars show through to its very high share
of foreign exchange transactions, where, according to the latest statistics from the Bank
for International Settlements, the dollar remains by far the most commonly traded
currency.10 The size and depth of dollar foreign exchange markets mean the dollar is
frequently used as a "vehicle" currency:
Even when firms and investors around the globe
want to transact in two currencies that don't include the dollar, they typically find that it
is easier and less expensive to first conduct a trade between the initial currency and the
dollar and then conduct a second trade to exchange the dollars for the second currency.11
The final role for an international currency is as a unit of account, and an
this dimension is its use as an "anchor currency" against which
important measure on
other countries may attempt to limit their exchange rate movements. Here, the research
finds that the dollar's usage as an anchor currency has increased somewhat over the past
two decades. Not including the U.S., economies anchored to the dollar accounted for
roughly 50 percent of world gross domestic product (GDP) by 2015. By contrast, the
share of world GDP anchored to the euro was only 5 percent (not counting the euro area
itself).12
To recap, by standard measures of an international currency's use, there has not
been any notable erosion in the dollar's dominance over the past couple
of decades.
Going forward, however, there are potential challenges to the dollar's international status,
and some recent developments have the potential to boost the international use of other
currencies.
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A shifting payments landscape-for example, the rapid growth of digital
currencies-could reduce reliance on the U.S. dollar. People often conjecture that
cryptocurrencies like Bitcoin may replace the U.S. dollar as the world's reserve currency.
But most trading in decentralized finance (DeFi) involve trades using stablecoins, which
link their value one-for-one to the U.S. dollar. About 99 percent of stablecoin market
capitalization is linked to the U.S. dollar, meaning that crypto-assets are de facto traded
in U.S. dollars. So it is likely that any expansion of trading in the DeFi world will simply
strengthen the dominant role of the dollar.
A second potential challenge to the dollar could be increased prominence of the
euro, the second most widely used international currency. Like the U.S., the European
Union (EU) is a large economy with fairly deep financial markets, generally free trade,
and robust and stable institutions. Wider use of the euro as a reserve currency may have
been held back by the lack of a deep and liquid market for EU debt, though there have
been some notable recent developments. During the COVID-19 crisis, the EU issued an
unprecedented amount of jointly backed debt, reaching about EUR 400 billion by May
2023. While this is a noteworthy development for the EU, this amount is tiny compared
with the $24 trillion outstanding in U.S. Treasury securities.13
The continued rapid growth of China and Chinese efforts to boost the use of their
currency could make the Chinese renminbi a more attractive competitor to the dollar and
increase its international use. Several factors currently weigh against the renminbi as an
attractive asset for international investors: It is not freely exchangeable, the Chinese
capital account is not open, and investor confidence in Chinese institutions is relatively
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low. Recent endeavors by China to overcome these shortcomings include increased
efforts to promote renminbi invoicing. For example, it reached an agreement with Brazil
to allow Chinese and Brazilian companies to settle trade in their domestic currencies and
has been in discussion with Saudi Arabia to potentially price oil trade in renminbi.
However, outside analysts generally view these agreements as symbolic and at most
laying the groundwork for potential future use of the Chinese renminbi in very isolated
instances.
Some commentators have also argued that sanctions imposed by the United States
and its allies on Russia following the invasion of Ukraine could make the dollar less
attractive as a reserve currency for the United States's geopolitical adversaries. In
practice, however, U.S. adversaries have few practical alternatives to the dollar, as other
prominent reserve currencies-such as the euro, Japanese yen, and British pound-are all
issued by close U.S. allies, who also participated in sanctions on Russia.
More generally, some worry that the dollar's role could be threatened by a move
toward so-called geoeconomic fragmentation, in which trade and financial flows realign
and become restricted within blocs of allied countries. The formation of a bloc that
the United States'
excludes the U.S.-or even explicitly seeks to counter role in the
global economy-could make some countries less likely to denominate international
transactions in dollars.
This scenario sounds alarming, but thus far, trends that appear consistent with
fragmentation largely can be explained by specific policy actions. One example is the
dramatic reallocation of U.S.-China trade in recent years, as firms in each country
decrease reliance on imports sourced from the other. While this shift has coincided with
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a period of heightened geopolitical tensions, the evidence suggests a simpler explanation:
firms responding to changes in relative prices, in this case caused by the imposition of
reciprocal tariffs by the two countries since 2018. For example, while U.S. imports of
tariff-affected goods from China have plunged, imports of goods not subject to tariffs
have continued to rise.14 Despite the reallocation of trade flows across countries, at the
end of the day, those trade flows continue to be invoiced mainly in dollars.
A final consideration regarding the international use of the dollar relates to
financial stability concerns. In times of global financial stress, investors and
governments seek a safe haven to protect the value of their assets and stabilize their own
financial markets. When this happens, there is almost always a "flight to the dollar" and
heightened demand for U.S. dollar assets. We saw this in 2008 and again in 2020. This
is the ultimate vindication that the U.S. dollar is the world's reserve currency
and is likely
to remain so-in times of global stress, the world runs to the dollar, not away from it.
To conclude, for the reasons I have laid out here, I do not expect to see the U.S.
dollar lose its status as the world's reserve currency anytime soon, nor even
see a
significant decline in its primacy in trade and finance. Recent developments that some
have warned could threaten that status have, if anything, strengthened it, at least so far.
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