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

Abstract

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: https://ssrn.com/abstract=3882546 or http://dx.doi.org/10.2139/ssrn.3882546

Fabricius Somogyi (Contact Author)

D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
594
Abstract Views
2,517
Rank
84,688
PlumX Metrics