Dollar Dominance in FX Trading

80 Pages Posted: 2 Aug 2021 Last revised: 29 Dec 2023

See all articles by Fabricius Somogyi

Fabricius Somogyi

D’Amore-McKim School of Business

Date Written: August 1, 2022


Over 85% of all foreign exchange (FX) transactions involve the US dollar, whereas the United States accounts for a much smaller fraction of global economic activity. My paper attributes the dominance of the dollar in FX trading to the strategic avoidance of price impact. Using a novel identification strategy, I show that 23-37% of the volume in dollar pairs arises from using the dollar as a vehicle currency to indirectly exchange two non-dollar currencies. To rationalise this result, I derive three model-based conditions for dollar dominance. I empirically test these conditions and provide evidence consistent with the theoretical framework.

Keywords: Dollar dominance, FX volume, price impact, strategic complementarity

JEL Classification: F31, G12, G15

Suggested Citation

Somogyi, Fabricius, Dollar Dominance in FX Trading (August 1, 2022). Northeastern U. D’Amore-McKim School of Business Research Paper No. 4067388 , Available at SSRN: or

Fabricius Somogyi (Contact Author)

D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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