Dollar domination: why global markets depend on the U.S. currency
From the dominant reserve currency for central banks to the main conduit for global trade and borrowing, U.S. dollars are the lifeblood for banks and markets around the world.
A Fed research paper estimated in 2017 that as much as 70% of all dollars are held outside the United States and 60% of all $100 bills circulated overseas.
Another Fed paper this year said roughly half the 1.6 trillion of dollar banknotes in circulation were outside the United States.
Markets got a reminder of the greenback’s hegemony in September when a squeeze in overnight dollar funding rates in New York sent shivers across the world.
Governments and central banks have tried to reduce their dollar-dependency, with Bank of England governor Mark Carney describing its role in the world economy as “destabilising”. But de-dollarisation is likely to take many years.
Here are some ways the dollar is used:
CENTRAL BANK RESERVE HOLDINGS
* Reserves of different currencies are held by central banksto settle international claims, intervene in foreign exchangemarkets or as rainy-day funds. * Total reserves in U.S. dollars were $6.79 trillion in thesecond quarter of 2019 – more than 60% of the total,International Monetary Fund data shows. * As some countries, such as Russia, reduce their proportionof dollars, the greenback’s share was the lowest since 2013, theIMF data showed * The euro is the second most popular reserve currency,accounting for 20% of global holdings. * Since 2010, the Japanese yen’s role as a reserve currencyhas declined to 5.4% while the Chinese yuan has become moreprominent, although represents just 2%.
* The dollar is dominant for transactions between non-U.S.exporters and importers. * The proportion of invoices denominated in dollars isnearly five times the dollar’s share of world imports, data fromthe Bank for International Settlements (BIS), an umbrella groupof the world’s central banks, shows. * In 2018, more than half of all goods imported into the EUfrom non-members were invoiced in U.S. dollars, compared to justa third in euros, Eurostat data shows. * Companies operating in global markets, such as theairplane-maker Airbus, often list their prices in dollars.Former European Commission President Jean-Claude Juncker said itwas “ridiculous that European companies buy European planes indollars instead of the euro”. * The BIS found 80% of financing of trade between banks isin dollars.
* Commodities such as oil and gold are typically denominatedin U.S. dollars, as are benchmark futures such as Brent. * Gulf oil producers peg their currencies to the dollar toavoid risk from fluctuations when invoicing their sales. * The dollar’s supremacy was highlighted in 2018 whenWashington decided to reimpose sanctions on Iran and all thosedoing business with it – any country breaking sanctions riskedhaving access to dollars cut off. * China has launched yuan crude futures which couldeventually become a global price benchmark alongside Brent andWTI. But a pre-requisite would be liberalising China’s capitalaccount to allow free movement of money.
INVESTMENTS AND BORROWING
* U.S. dollar lending to non-bank borrowers outside the U.S.stood at $11.9 trillion at the end of June 2019, more thandoubling over the past decade, BIS data shows. * Foreign currency borrowing is particularly common inemerging markets which now have a record $3.74 trillion indollar debt, the BIS said. * But emerging markets’ dollar borrowing rates slowed to 2%versus recent 8% peaks. * It is considered more risky, and is therefore expensive,for non-U.S. banks to borrow in dollars, because they are likelyto have fewer dollar deposits relative to their dollar debt.
Source: Reuters (By Elizabeth Howcroft)