Why does one country's currency price everyone else's trade?

The dollar is not simply the largest currency. It occupies a structurally different position from every other currency in the world, and that position explains behaviour — including the crisis behaviour in this unit's first lesson — that no amount of interest-rate analysis can account for.

The four numbers

• Trading. The BIS triennial survey found the US dollar on one side of roughly 89% of all FX transactions in April 2025 (out of a possible 200%, since every trade has two sides), a shade higher than the 88% recorded in April 2022. Trades between two non-dollar currencies are frequently executed as two dollar legs, because that is where the liquidity is.
• Reserves. The IMF's COFER data has put the dollar at just under 60% of allocated official reserves in recent years, down from around 70% at the start of the century.
• Invoicing. On the order of 40% of world trade is invoiced in dollars, against a US share of world merchandise trade closer to a tenth. Countries that never trade with the United States still price their exports in dollars.
• Debt. Around half of cross-border bank claims and international debt securities are dollar-denominated. Enormous quantities of dollar debt are owed by entities with no dollar revenue.

Why this creates a scramble

Combine invoicing and debt and you get the mechanism. A borrower in an emerging economy earns local currency and owes dollars. When trouble arrives:

• The dollar debt still has to be serviced.
• Trade still has to be paid for in dollars.
• Banks that had been supplying dollars through FX swaps pull back.

So global stress produces global demand for dollars, regardless of where the stress originated. This is why the dollar rose in 2008 — a crisis manufactured in American mortgage markets — and again in March 2020, when the dollar index gained roughly 8% between 9 and 20 March even as US markets were collapsing.

"The dollar index" in that sentence is one specific basket. The ICE US Dollar Index, DXY, weights six currencies, unchanged since 1999: euro 57.6%, yen 13.6%, sterling 11.9%, Canadian dollar 9.1%, Swedish krona 4.2%, Swiss franc 3.6%. It holds no renminbi, peso or won, so it measures the dollar against Europe and Japan, and most of its daily move is EUR/USD upside down. A note that cites EUR/USD falling and DXY rising as two pieces of evidence has cited one. The Federal Reserve's broad trade-weighted index covers 26 currencies weighted by trade, and the BIS publishes effective exchange rates for every major economy; those are the nearest thing to the price of a currency that the first course said does not exist.

The response tells you how structural this is. On 15 March 2020 the Federal Reserve enhanced its standing swap lines with five major central banks, and on 19 March it extended temporary lines to nine more, bringing the network to fourteen. The Fed was acting, in effect, as a lender of last resort in dollars to the rest of the world — because the rest of the world's liabilities are partly in dollars.

The privilege and the dilemma

Valéry Giscard d'Estaing's phrase "exorbitant privilege" captures the benefits: the United States borrows internationally in its own currency, so it cannot be forced into default by a currency move, and it earns a persistent return differential between its foreign assets and its foreign liabilities.

The Triffin dilemma, named for Robert Triffin's 1960 argument, captures the tension: the world's demand for the reserve asset requires the issuer to supply its liabilities in ever-growing quantity, which over long horizons can conflict with the issuer's own stability. The dilemma has been announced as imminent for six decades, which is itself instructive.

What has actually changed

Slowly, and less than the commentary suggests. The dollar's reserve share has drifted down over twenty-five years, but the beneficiaries have mostly been smaller currencies — the Australian and Canadian dollars, the Korean won, the renminbi — rather than the euro, whose share has been broadly flat. The renminbi's share of allocated reserves remains low, around a couple of percent.

The reason is network effects. A reserve currency needs deep, liquid, safe asset markets that foreigners can enter and exit freely, in size, at any hour. Very few candidates satisfy all of those conditions simultaneously, and the incumbent gets more useful the more people use it. That is a description of a stable equilibrium, not a prediction that it is permanent — and predictions in both directions have an unimpressive track record.

Try it now

1. Three majors over their full histories are below. Navigate all three to March 2020 and describe what the dollar did against every one of them at once. A currency that rises against everything simultaneously is not being bought for a view on its economy.

2. Measure each of the three across those same weeks and write the percentages in a column — remembering that the first two fall when the dollar strengthens and the third rises. Getting the signs right is most of the exercise.
3. Now scale it: an emerging-market currency can move several times as far in the same weeks. Write one neutral sentence explaining why, using the debt-and-invoicing mechanism above — a country whose borrowings are in dollars owes more the moment the dollar rises, and it cannot print the currency it owes.