Although other central banks have also established swap lines, non-dollar-denomindated swap lines offered by the European Central Bank and other central banks saw little usage see Figure 7b.
This fact highlights how crucial dollar funding is in the operations of many internationally active banks. Note: In Figure 7a legend entries appear in graph order from top to bottom.
Federal reserve swap line provisions to the Bank of England, Bank of Japan, and other central are at or near 0 prior to September Provisions to the Swiss National Bank are at or near 0 prior to March Swap line provisions for the European Central Bank are 0 or near 0 when shown in billions October and after February Issuance of foreign currency debt—debt issued by firms in a currency other than that of their home country — is also dominated by the U.
The percentage of foreign currency debt denominated in U. This puts the dollar well ahead of the euro, whose share is 23 percent. Note: Foreign currency debt is denominated in a foreign currency relative to the country of the issuing firm not the location of issuance.
Chinese renmimbi is 0 until The many sources of demand for U. This share has remained stable over the past 20 years Figure 9. In contrast, the euro was bought or sold in 32 percent of FX transactions, a decline from its peak of 39 percent in Note: On a net-net basis at current exchange rates.
Percentages sum to percent because every FX transaction includes two currencies. A review of the use of the dollar globally over the last two decades suggests a dominant and relatively stable role.
To illustrate this stability, we construct an aggregate index of international currency usage. This index is computed as the weighted average of five measures of currency usage for which time series data are available: Official currency reserves, FX transaction volume, foreign currency debt instruments outstanding, cross-border deposits, and cross-border loans. We display this index of international currency usage in Figure The dollar index level has remained stable at a value of about 75 since the Global Financial Crisis in , well ahead of all other currencies.
The euro has the next-highest value at about 25, and its value has remained fairly stable as well. While international usage of the Chinese renminbi has increased over the past 20 years, it has only reached an index level of about 3, remaining even behind the Japanese yen and British pound, which are at about 8 and 7, respectively.
Note: Index is a weighted average of each currency's share of globally disclosed FX reserves 25 percent weight , FX transaction volume 25 percent , foreign currency debt issuance 25 percent , foreign currency and international banking claims Near-term challenges to the U. In modern history there has been only one instance of a predominant currency switching—the replacement of the British pound by the dollar.
The dollar rose to prominence after the financial crisis associated with World War I, then solidified its international role after the Bretton Woods Agreement in Tooze , Eichengreen and Flandreau , Carter However, over a longer horizon there is more risk of a challenge to the dollar's international status, and some recent developments have the potential to boost the international usage of other currencies.
Increased European integration is one possible source of challenge, as the European Union EU is a large economy with fairly deep financial markets, generally free trade, and robust and stable institions. If fiscal integration progresses and a large, liquid market for EU bonds develops, the euro could become more attractive as a reserve currency.
This integration could potentially be accelerated by enhancements to the EU's sovereign debt market infrastructure and introducing a digital euro. Additionally, the euro's prominent role in corporate and sovereign green finance could bolster its international status if these continue to grow. However, even with more fiscal integration, remaining political separation will continue to cause policy uncertainty.
Another source of challenges to the U. Chinese GDP already exceeds U. GDP in nominal terms in the s. There are significant roadblocks to more widespread use of the Chinese renminbi. Importantly, the renminbi is not freely exchangeable, the Chinese capital account is not open, and investor confidence in Chinese institutions, including the rule of law, is relatively low Wincuinas These factors all make the Chinese renmimbi—in whatever form—relatively unattractive for international investors.
A shifting payments landscape could also pose a challenge to the U. For example, the rapid growth of digital currencies, both private sector and official, could reduce reliance on the U. Changing consumer and investor preferences, combined with the possibility of new products, could shift the balance of perceived costs and benefits enough at the margin to overcome some of the inertia that helps to maintain the dollar's leading role.
That said, it is unlikely that technology alone could alter the landscape enough to completely offset the long-standing reasons the dollar has been dominant. In sum, absent any large-scale political or economic changes which damage the value of the U. Boz, E. Casas, G. Georgiadis, G. Gopinath, H. Le Mezo, A. Mehl, and T. Nguyen Carter, Z. Random House. The Economist Accessed August 18, Eichengreen, B.
Flandreau Judson, R. Not So Fast: Demand for U. In the fourth quarter of , the Chinese renminbi became another one of the world's reserve currencies. China wants its currency to be fully traded on the global foreign exchange markets.
It would like the yuan to replace the dollar as the global currency. To do so, China is reforming its economy. Despite trillions of dollars in foreign debt and continuous large deficit spending, the United States still holds global trust and confidence in its ability to pay its obligations.
For this reason, the U. It may continue to be the top global currency in the years to come. Countries such as China and Russia feel a new one-world currency, one not backed by any one nation, is overdue in this increasingly integrated global economy. International Money Fund. Currency Education Program. Currency in Circulation. International Monetary Fund. Federal Reserve Bank of New York.
Accessed April 22, Bank for International Settlements. World Integrated Trade Solutions. The World Bank. Federal Reserve History. Ahmet Arif Eren. Ijopec Publication, Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.
Measure content performance. Develop and improve products. List of Partners vendors. World Economy Trade Policy. Table of Contents Expand. The reserve status is based largely on the size and strength of the U. Despite large deficit spending, trillions of dollars in debt, and the unbridled printing of U.
Treasury securities remain the safest way to store money. The trust and confidence that the world has in the ability of the United States to pay its debts keep the dollar as the most redeemable currency for facilitating world commerce. The history of paper currency in the United States dates back to colonial times when banknotes were used to fund military operations.
This was a year after the Federal Reserve Act was established. The decision was made by a delegation from 44 Allied countries called the Bretton Woods Agreement. There are a series of alternatives that could replace the dollar as the next global reserve currency.
The euro is the most used reserve after the dollar and could replace the dollar if economic conditions move in its favor. China's renminbi could surpass the dollar, a goal that the country's leaders are keen on realizing.
Currency Education Program. Accessed Sept. Dollar Became The World's Currency. Will That Last? Federal Reserve History. CMC Markets. Council on Foreign Relations. Monetary Policy. Actively scan device characteristics for identification.
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Economics Macroeconomics. Table of Contents Expand. History of the U. The Gold Standard. The Bretton Woods Agreement. Dollar Becomes Reserve Currency. Dollar Today.
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