Board of Governors of the Federal Reserve System

August 12, 2024

Third Conference on the International Roles of the U.S. Dollar

Ricardo Correa, Linda S. Goldberg, Juan M. Londono, and Fabiola Ravazzolo¹

On May 20 and 21, 2024, the Federal Reserve Board and the Federal Reserve Bank of New York jointly hosted the Third Annual International Roles of the U.S. Dollar Conference. The conference brought together researchers, practitioners, and policymakers to understand how changes in the global economic and financial landscape may affect the central role of the dollar. Building on insights from the inaugural conference held in 2022 (summarized in a post on FEDS Notes and Liberty Street Economics) and the second conference in 2023 (also captured on FEDS Notes and Liberty Street Economics), this event focused on how the global roles of the dollar may evolve in an environment of rapid geopolitical changes and technological advancements in payment systems.

In welcoming remarks, Fed Governor Christopher J. Waller discussed the key roles that the dollar plays globally, the benefits of the primacy of the dollar for the U.S. and the rest of the world, and the resilience of the dollar's international status. Governor Waller also highlighted the role of the Federal Reserve in supporting the use of dollars internationally through liquidity facilities, including central bank liquidity swap lines, to mitigate the potential financial stability challenges that the broad use of the U.S. dollar can pose for financial systems in the U.S. and the rest of the world.

Academic research sessions focused on three broad areas. First, Linda Goldberg and Ryan Charhour presented papers informing how geopolitics and economic sanctions can influence the role of the dollar as a reserve currency and as a unit of account for international trade transactions. Ryan presented a framework to explore whether escalating geoeconomic conflict and protectionism could threaten the dominant role of the U.S. dollar in the international monetary system, while Linda found that increases in geopolitical distance from the U.S. (representing less geopolitical ties) has not led to broad shifts away from U.S. dollar assets, as official reserves held by countries must satisfy the foreign currency liquidity needs of associated central banks. Second, Kristy Jansen presented a paper looking at the importance of the U.S. dollar in the determination of investors' holdings, and Hillary Stein's presentation explored how the capacity to bear risk at financial institutions can affect exchange rates and the cost of synthetic dollar funding. Lastly, the papers by Scott Davies and Mortiz Lenel focused on the interlinkages between the different roles of the dollar—including its safe haven currency status and its role as a unit of account and invoicing—and covered interest parity deviations. They showed how the backstop dollar liquidity provision provided though central bank swap lines help mitigate extreme changes in the cost of global offshore dollar funding in periods of market strains, limiting spillovers to other markets and to the U.S. financial system.

The relevance of cross-border payment systems for understanding how the global usages of the dollar may evolve was the focus of presentations by participants in a panel discussing global payments, as well as keynote remarks by Stijn Claessens and a lecture on bank settlements systems by Angelo Ranaldo. Angelo offered insight into how payment-versus-payment settlement transactions in foreign exchange (FX) markets can help understand the structure of over-the-counter FX derivatives markets. Information on high-frequency transactions, including the type and nationality of counterparties involved in these transactions, were shown to be useful for identifying changes in some players' behavior around end of quarters, possibly to meet regulatory requirements.

In keynote remarks, Stijn Claessens, currently an executive fellow and lecturer at Yale University, provided a comprehensive analysis of changes in the fundamental drivers of the prominent roles of the U.S. dollar in international markets, with a special focus on the roles of private and public sectors on the supply of U.S.-dollar services. While the fundamental drivers of the U.S. dollar as a unit of account, means of exchange, and store of value have changed, these changes have had little impact on the dollar's hegemony thus far. However, Stijn also noted that a more fragmentated world with broader financial sanctions, an increase in trade barriers, and technological changes could affect the prominent role of the U.S. dollar. While the official and private supply of U.S. dollar-related services, including cross-border payment systems, is responding to these changes through innovation and experimentation, more institutional improvement is likely and necessary.

The panel on global payments systems, moderated by Michelle Neal of the New York Fed, provided different perspectives on how evolving and new forms of payments could impact dollar capital flows and the international usages of the U.S dollar. Jay Shambaugh (U.S. Treasury Department), Morten Bech (Bank of International Settlements), Tobias Adrian (International Monetary Fund), Joyce Chung (J.P. Morgan), and Wenxin Du (Columbia University) presented diverse and complementary views on this topic. In its international role, the U.S. dollar serves as a reliable settlement unit in cross-border transactions, and a large amount of dollar activity clears and settles across numerous payment systems. Technological advancements are supporting the growth of faster transactions and numerous initiatives are experimenting solutions to enhance the interoperability of cross-border payment systems. Among the points raised by the panelists were that a dollar-based system offers benefits to the U.S. and the global financial system as it facilitates international transactions in a highly liquid currency, reduces transaction costs, and ensures order. With domestic systems, such as new instant payments through FedNow, and global payment systems undergoing remarkable innovation and change, the United States is taking steps to ensure that the dollar-based system continues to fulfil its functions.

Panelists explained that payment innovation must not compromise the safety, security, and reliability of the international financial system given that this is a critical part of financial stability. They noted that, while innovation offers solutions, new risks that could impact dollar capital flows may emerge and have financial stability implications. They discussed that efforts should be internationally coordinated and geared to safeguard the integrity of the international monetary system and ensure compliance. To take one example, panelists highlighted the key role of the public sector, in facilitating, via innovation hubs, private engagements, and the use of new technology to ensure the identification of solutions that are in line with public policy goals. They also pointed out that while some emerging market economies now settle commodity payments away from the dollar to reduce costs, the dollar remains by far the most widely used currency in global transactions.

The presentations and discussions at this year's conference point to minimal changes in the preeminent role of the dollar in the global economy. While changes have been underway on international financial linkages and payments systems, and geopolitics continues to raise fragmentation concerns, the use of dollars in finance and within the international monetary system remain supported by the depth and liquidity of U.S. dollar-denominated financial markets and by the Federal Reserve's standing international liquidity backstop facilities. The themes of the conference, however, reinforce the need for further research and analytics to understand the implications of rapid infrastructural innovations and the opportunity to utilize new data sources for assessing developments.

1. Ricardo Correa and Juan M. Londono are at the Federal Reserve Board. Linda S. Goldberg and Fabiola Ravazzolo are at the Federal Reserve Bank of New York. The views expressed in this note are strictly those of the authors and do not necessarily represent the views of the Federal Reserve Board, the Federal Reserve Bank of New York, or the Federal Reserve System. Return to text