Hello and welcome to the inaugural conference on the international roles of the US dollar. Thank you all for participating and lending your expertise on this important topic. This conference marks the first use of our new Martin conference center, which I hope you will enjoy.
The international financial and monetary system that emerged after World War II was defined by the centrality of the dollar. It is the world’s reserve currency and the most widely used for payments and investments. As noted in recent work by Council staff, this global preeminence has been supported by the depth and liquidity of US financial markets, the size and strength of the US economy, its stability and openness to trade and capital, and international confidence in American institutions. and the rule of law.1 Professor Barry Eichengreen will expand on some of these themes later this morning.
The international role of the dollar has many advantages. For the United States, this reduces transaction fees and borrowing costs for American households, businesses, and the government. Its ubiquity helps contain uncertainty and, therefore, the cost of hedging for households and businesses across the country. For foreign economies, the widespread use of the dollar gives borrowers access to a wide range of lenders and investors, reducing their financing and transaction costs. The advantages of the dollar as the dominant reserve currency have generated a wealth of academic literature. Yesterday’s article on the Treasury market by Alexandra Tabova and Frank Warnock extends this work significantly.
The Federal Reserve’s strong commitment to our price stability mandate contributes to widespread confidence in the dollar as a store of value. To that end, my colleagues and I are strongly focused on getting inflation back to our 2% target. Fulfilling our dual mandate also depends on maintaining financial stability. The Fed’s commitment to our dual mandate and financial stability encourages the international community to hold and use dollars.
The widespread use of the dollar globally can also pose financial stability issues that can significantly affect households, businesses and markets. For this reason, the Federal Reserve has played a key role in promoting financial stability and supporting the use of the dollar internationally through our liquidity facilities. Central bank liquidity swap lines provide foreign central banks with the ability to provide US dollar funding to institutions in their jurisdiction. And the Foreign and International Monetary Authority (FIMA) Repurchase Facility allows FIMA-approved account holders to temporarily exchange their US Treasury securities held by the Federal Reserve for US dollars. These facilities serve as safety nets so that holders of dollar assets and participants in dollar funding markets can be confident that stresses will be eased when those markets are in trouble. This insurance, in turn, mitigates the effect of these stresses on the flow of credit to US households and businesses. Both facilities reinforce the dollar’s position as the dominant global currency.
Swap lines were used extensively during the global financial crisis, the Eurozone debt crisis of 2011, and the financial turmoil at the onset of the COVID-19 pandemic in 2020. The swap lines article Central Banks presented yesterday by Gerardo Ferrara, Philippe Mueller, Ganesh Viswanath-Natraj and Junxuan Wang provide new micro-level evidence on the usefulness of swap lines to provide cross-border liquidity to support the real economy.
Going forward, rapid changes are occurring in the global monetary system that could affect the international role of the dollar in the future. Most major economies have already developed or are in the process of developing instant 24/7 payments. Our own FedNow service will go live in 2023. And in light of the phenomenal growth of crypto-assets and stablecoins, the Federal Reserve is examining whether a US central bank digital currency (CBDC) would enhance already secure domestic payments. and efficient. system. As the Fed’s white paper on this topic notes, a US CBDC could also help maintain the dollar’s international standing.2 As we review the comments on the document, we will reflect not only on the current state of the world, but also on how the global financial system might evolve over the next 5-10 years. The article by Jiakai Chen and Asani Sarkar, which is on the agenda today, and our eminent panelists on this topic this afternoon, will provide important information on this issue.
In summary, I would like to underscore the importance of the dollar to US and global economies and financial markets. It is essential that we understand the channels, connections and effects of the role of the dollar.
In closing, I would like to thank you all for taking the time to participate in our discussion on the international roles of the dollar. This conference brings together world-class researchers, practitioners and policy makers dedicated to understanding and solving these vital issues. I look forward to their ideas and hope you enjoy the conference.
1. See Carol Bertaut, Bastian von Beschwitz and Stephanie Curcuru (2021), “The International Role of the US Dollar”, FEDS Note (Washington: Board of Governors of the Federal Reserve System, October 6). Back to text
2. Board of Governors of the Federal Reserve System (2021), Currency and Payments: The US Dollar in the Age of Digital Transformation (PDF) (Washington: Board of Governors, January). Return to text