The fourth International Roles of the U.S. Dollar Conference, held in September, brought together researchers, practitioners, and policymakers to examine the factors sustaining the dollar’s international roles, the evolving global fund allocation to U.S. safe assets, and the liquidity of these assets in a time of geopolitical and technological changes.
Past conferences in the series focused on the financial market conditions that contribute to dollar use globally and the rapid advances in infrastructure of international payment systems. The next conference, in June 2026, will focus on digital assets, including stablecoins.
One theme of this year’s conference was historical transitions across dominant currencies—both those that occurred and those that, perhaps surprisingly, did not. A panel focused on historical episodes of dominant currency strains and transitions, moderated by Linda Goldberg, with panelists Catherine Schenk, Jeffry Frieden, Maurice Obstfeld, and Brad Setser, highlighted how currency transitions typically occur gradually over decades rather than through sudden shifts. Drawing on historical examples, such as the British pound’s eventual displacement by the U.S. dollar, the panelists noted that dominant currencies benefit from strong network effects, institutional support, and market depth, creating significant inertia that resists rapid change.
However, international currency status can be decoupled from status in total international trade flows, as shown by the late 19th century and early 20th century experience. Additionally, the payments architecture plays a significant role.
Still, persistent structural challenges, such as fiscal deterioration, institutional erosion, or the emergence of viable alternatives with sufficient scale and liquidity, can eventually lead to currency realignments. Trust in a currency also matters, as both political and economic factors historically have contributed to confidence, panelists said. In this regard, sovereign debt and balance of payments dynamics are intertwined, as complex cross-border financial intermediation flows depend on the desires of private investors to keep financial assets close to home in stress periods.
Fund Managers Value Network Effects and Liquidity
On a panel moderated by Anna Nordstrom, market participants from global fund managers in both the public and private sectors highlighted how cyclical and structural factors support global asset allocation to U.S. assets, despite an emerging desire for diversification away from dollar assets.
Panelists Mahmood Pradhan, Malin Norberg, Daleep Singh, and Andrew Wai Hung Ng noted that U.S. assets continue to offer relatively higher returns than international assets. Those returns are why global investors maintain exposure to U.S. assets, particularly in the growth and tech sectors, panelists said.
Still, panelists see an emerging diversification of global portfolios. At a small scale, investors are moving away from U.S.-dollar assets into investments including gold, real estate, and crypto to hedge against both geostrategic and portfolio concerns. Any sudden shift to lower policy rates in the U.S. or structural issues, such as deterioration in fiscal sustainability and institutional perception, could encourage more sizable U.S. asset diversification, panelists said. However, any desire by global investors to reallocate away from the dollar remains limited by its unique strong network effects and the unmatched market depth and liquidity of U.S. assets.
Rate Levels and Currency Value Could Change if International Roles Diminish
In keynote remarks, Stanford professor Arvind Krishnamurthy raised a question: How much will U.S. interest rates and the dollar exchange rate change if the world moves to an equilibrium where the U.S. dollar is no longer the world’s reserve currency?
Convenience yields on certain dollar short-term assets have fallen over the past five years and nearly disappeared recently, he said. Convenience yields had been high on U.S. safe assets, including reserves, Treasuries, and private debt. While U.S. short-term T-bills still have a material convenience yield, convenience yields for Treasury bonds have declined as longer-term U.S. government debt has raised more worries about the future, he said.
Krishnamurthy argued that safety and liquidity are impacted by a quantity tension: Liquidity is improved when the size of float of available safe assets is higher. However, this force can be counteracted if the safety of assets is compromised when there is too much debt relative to fiscal capacity and inflation concerns arise.
Research Explores Strengths and Vulnerabilities of Global Dollar System
The academic papers presented at the conferences provided theoretical foundations and empirical evidence showing how firm behavior, market intermediation, and institutional choices sustain the global dollar system while simultaneously creating vulnerabilities that can trigger widespread instability. They also discussed institutional responses that could mitigate systemic risk derived from the centrality of the dollar.
Joseph Abadi presented a framework to understand how strategic complementarities in invoicing, financing, and reserve management sustain the dollar’s role as the international currency of choice. The framework also formalizes the idea that the dollar’s centrality is equilibrium-driven, persistent, and subject to high switching costs. Dora Xia presented work complementing Abadi’s framework with an empirical analysis of Treasury demand, showing how Treasuries serve as the balance sheet foundation of dollar dominance, anchoring the convenience yield that underpins the dollar’s role. Paul Fontanier explained how dollar liabilities in emerging markets feed into higher interest rates in a global financial cycle.
Some papers focused on foreign exchange (FX) risk management through FX derivatives and dollar funding. Daniel Ostry’s work on the FX derivatives market in London, the world’s largest center for currency trading, shows the FX derivative market is overwhelmingly dollar-centric and important for the funding and hedging of foreign investors’ U.S. asset holdings. Wenxin Du explained frictions in the dollar funding intermediation between repos and FX swaps instruments driven by regulation and leveraged constraints. Wentong Chen discussed the dollar’s role in FX derivatives from a corporate perspective, highlighting the role of FX derivatives in generating positive spillovers along production networks and reducing investment and employment volatility. Her work highlights that many firms, especially smaller ones, are not directly accessing FX derivatives.
Presenters also discussed the role of central bank backstops in reducing funding stress. Ambrogio Cesa-Bianchi showed empirical evidence that Fed swap lines reduce dollar funding stress, and Yao Zeng explained how intermediated dollar lending received from dollar operations associated with swap lines supports smooth offshore dollar funding markets.
Conclusion
The U.S. dollar continues to have strong and dominant roles in all types of international transactions, followed by the euro. Still, speakers emphasized that transitions from key currencies have historically been slow, so potential erosion of dollar roles remains an important area to monitor. We will continue these timely discussions at the Fifth Conference on the International Roles of the U.S. Dollar in June, focusing especially on digital assets, including stablecoins.
Ricardo Correa is a senior advisor on international finance at the Board of Governors of the Federal Reserve System.
Linda S. Goldberg is a financial research advisor for Financial Intermediation Policy Research in the New York Fed’s Research and Statistics Group.
Juan Londono is the chief of the International Financial Stability Section of the Board of Governors of the Federal Reserve System.
Fabiola Ravazzolo is an advisor in the New York Fed’s Markets Group.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
