The U.S. Dollar in the Global Economy

May 18, 2023
Michelle Neal, Head of the Markets Group
Remarks at the 2nd Annual International Roles of the U.S. Dollar Conference, Federal Reserve Bank of New York, New York City As prepared for delivery

Good morning, and welcome to the second annual conference on the International Roles of the U.S. Dollar. I want to thank you all for participating today. It's great to see so many of you were able to make it in person as we host this conference in New York for the first time. Given the excellent discussion topics and speakers lined up, I have no doubt that we are in for an engaging and thoughtful discourse.  I would also like to thank the organizing committee—Linda Goldberg, Patrick Douglass, and Robert Lerman from the Federal Reserve Bank of New York, and Ricardo Correa and Juan Miguel Londono from the Federal Reserve Board International Finance Division—for their diligent work putting this event together.  Before I begin, I want to note that my remarks today are my own and do not necessarily reflect the views of the New York Fed or the Federal Reserve System.

The overarching theme of this conference is of critical importance, as the U.S. dollar plays a central role in foreign exchange (FX) markets and the international financial system more broadly. Indeed, the latest Bank of International Settlements triennial survey shows that the U.S. dollar remains the most widely used currency in FX transactions by a considerable margin. It is also the world's most widely used currency in official FX reserves, cross-border loans, international debt securities, SWIFT payments, and trade invoicing.

The ubiquity of the U.S. dollar in global transactions reflects several key factors, including the depth and liquidity of U.S. capital markets, the size of the U.S. economy, the dollar's convertibility, and an enduring confidence in our legal system and institutions.

This predominance of the dollar in international transactions has multiple benefits domestically and internationally. The widespread use of the dollar reduces transaction and borrowing costs for U.S. households, businesses, and the government. In addition, it helps reduce the cost of hedging for domestic households and businesses, since they do not face direct exposures to currency risks.

The dollar's international role also benefits the global economy. Dollar assets offer foreign investors stability in value and relative safety, as the dollar tends to appreciate during periods of market stress. It also provides access to the liquidity of U.S. financial markets, such as the U.S. Treasury market, which is the deepest and most liquid securities market in the world. 

The Federal Reserve plays a key role in promoting financial stability and supporting the use of dollars internationally. Our strong commitment to our price stability mandate has contributed to confidence in the dollar as a store of value.

We have also supported dollar usage through our dollar liquidity facilities, which are managed here at the New York Fed.  First, the central bank liquidity swap lines, which we maintain with several major central banks, are designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.

In addition, the Foreign and the International Monetary Authorities (FIMA) Repo Facility allows FIMA account holders to temporarily exchange U.S. Treasury securities for U.S. dollars, which can then be made available to institutions in their jurisdictions.  As a backstop source of temporary dollar liquidity for FIMA account holders, the FIMA Repo Facility can help address pressures in the U.S. Treasury Market and global dollar funding markets that could otherwise affect U.S. financial market conditions. It also helps support the smooth functioning of dollar asset markets and broader financial markets more generally.

Both the swap lines and the FIMA Repo Facility enhance the standing of the dollar by giving holders of dollar assets and participants in dollar funding markets confidence that liquidity backstops are available in times of market strains. Indeed, during the period of banking stress this March, we increased the frequency of swap line 7-day maturity operations from weekly to daily.  This enhanced provision of liquidity provided an important backstop to global funding markets.  Usage of the swap lines in March were relatively low compared to prior periods of market stress over recent years, indicating little systemic stress in dollar funding markets.

Moreover, the FIMA Repo Facility had its first sizeable draw for an extended period in March.  This activity demonstrates that FIMA accounts can quickly leverage their existing U.S. Treasury holdings to acquire dollar liquidity, minimizing the need for asset sales.

The critical role of both these liquidity facilities in global dollar funding markets will be discussed later this morning, during a panel moderated by our colleague Fabiola Ravazzolo. The engagement between dollar liquidity and dollar use in financial transactions and international portfolios will be discussed later today as well in a keynote by Professor Darrell Duffie, and a discussion moderated by Linda Goldberg.

The New York Fed has several other key responsibilities that tie directly to the importance of the dollar in the international monetary system. We facilitate the shipment of physical dollar cash across the globe given the international demand for hard currency. We manage the U.S.'s official portfolio of foreign currency assets on behalf of the System Open Market Account and the U.S. Treasury's Exchange Stabilization Fund. We provide a range of services to foreign international monetary institutions, acting as a custodian of some of their reserves and engaging in transactions on their behalf as directed. We also conduct technical research and experimentation, including with tokenization and digital assets, at the New York Innovation Center. We look forward to publishing research results from Project Cedar and the Regulated Liability Network, two projects experimenting with new technologies related to cross border payments. Finally, as a member of the Inter-Agency Working Group for Treasury Market Surveillance (IAWG), we work closely with other U.S. agencies to improve the resilience of the U.S. Treasury market, the stability of which supports the continued use of the dollar as a reserve currency across the world.

Summing up, the U.S. dollar continues to play multiple critical roles in the global economy, with significant benefits to households and businesses both domestically and abroad. But as the global financial system continues to evolve, there is frequent discussion of potential ways these roles can be challenged.  Recent years have been characterized by investor interest in other reserve currencies, less traditional alternatives, such as central bank digital currencies and other digital assets, and even commodities, such as gold.  With this in mind, the central role of the U.S. dollar should not be taken for granted.  For the dollar to maintain its status, it is important for U.S. elected officials and other policymakers to make decisions that instill confidence in our economy and institutions. 

Thank you again for joining us over the next two days. We look forward to learning from your insights.

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