The modern notion of an international currency involves use in areas of international ﬁnance and trade that extend well beyond central banks’ coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes.
From its launch in 1999, the euro’s global use steadily grew and, by the mid 2000s, it had cemented its status – together with the dollar – as a key international currency. Maggiori, Neiman, and Schreger (2018), however, demonstrate a surge in the use of the dollar and collapse in the use of the euro to denominate internationally traded corporate and sovereign bonds starting roughly around the time of the global ﬁnancial crisis. In this article, we provide evidence suggesting that this rise of the dollar and fall of the euro might be more pervasive, with similar patterns manifesting across most aspects of international currency use.
What forces are driving this shift? One factor may be the instability of the euro zone, made apparent by the recent turmoil in its sovereign debt markets. The early 2010s ushered in with a renewed fervor discussions of possible euro-zone exits and widespread uncertainty about what any such exit would entail. Borrowers and lenders alike might, on the margin, prefer to avoid a currency the value of which – and, even, the mere existence of which – might be in question during the next crisis. Another factor may be the sharp appreciation of the dollar (relative to the euro, as well as relative to most other currencies) and maintained liquidity of trade in dollar assets during the peak of the crisis. Dollar-denominated assets performed well precisely when such performance was most highly valued, a key feature of an international currency, as discussed in Gourinchas et al. (2011) and Maggiori (2017). Global investors, having learned from the recent crisis that the dollar but not the euro provides safety, may have shifted their expectations and are more heavily coordinating on the dollar as the only safe currency, a dynamic modeled by Farhi and Maggiori (2018) and He et al.(2019).
The strengthening of the dollar’s position at the center of the global ﬁnancial and trading system may carry important beneﬁts for the US. The disproportionate global use of the dollar suggests that the US continues to enjoy an “exorbitant privilege,” borrowing at lower costs than it otherwise would. As demonstrated in Maggiori et al. (2018), US corporations appear uniquely able to borrow from foreigners even without issuing foreign currency bonds. The dollar’s use in trade invoicing leaves US importers and exporters less exposed to exchange rate risk. And, as articulated in Farhi and Maggiori (2018), global welfare may be higher given the existence of and coordination around a single “safe-haven” currency.
Further dollar dominance does, however, present some risks for the global economy. Unexpected changes in the value of the dollar can rapidly redistribute wealth across global borrowers and lenders, as discussed in Bruno and Shin (2015). The increased use of the dollar for borrowing makes non-US corporates more vulnerable to an unexpected dollar appreciation, and as noted in Casas et al.(2016), the increased use of the dollar for trade invoicing means that such an appreciation might exacerbate home bias and dampen the scale of global trade. Finally, the euro’s declining role as an international currency, to the extent that it brings costs for the euro zone countries, comes at a difficult time for the Eurozone with several member countries saddled with high debt loads and unemployment rates still at elevated levels.