BlackRock Investment Institute

Macro insights

How global dollar reliance has grown

The rapid appreciation of the U.S. dollar in recent weeks has prompted comparisons to the global financial crisis (GFC) – when falling asset prices and spiking dollar-funding demand also drove up the value of the currency. But a growing global reliance on dollar funding over the past decade means that even more will have to be done during this crisis to provide dollar liquidity.

International credit to nonbanks outside U.S. as share of global GDP, 2000-2018

Sources: BlackRock Investment Institute, Bank of International Settlements, International Monetary Fund and the Federal Reserve, with data from Haver Analytics, April 2020. Notes: The chart shows international credit in the non-bank sector as a share of global GDP, in U.S. dollars, euros and yen. The credit amount is taken from BIS data, and IMF data is used to work out the share of global GDP. FX data from the Fed was used for currency conversions.

A key development since the GFC is that the dollar has gained even more share as an international funding currency. Dollar credit to nonbanks outside the U.S. has risen from 9% of global GDP in 2007 to 14% in 2018. And international credit denominated in euros and Japanese yen have both declined as a share of GDP (see the chart above).

This suggests that liquidity policies by the Federal Reserve need to be even more effective and far-reaching than those during the GFC. And so the efficacy of the Fed’s recent actions will be a useful signpost for how the global economy will fare throughout the coronavirus crisis – particularly as a growing body of research in recent years has suggested that the dollar acts as a dominant global currency with disproportionate effects on global trade and activity.

Emerging markets (EMs) are now in focus. According to the BIS, growth of U.S. dollar-denominated credit has exceeded that of other foreign currencies in recent years, particularly in emerging Asia and Latin America. The increasing reliance on dollar funding in EMs is reflected in recent currency moves. Between March 3rd and March 27th – the latest data available – the nominal trade-weighted U.S. dollar index has risen 2.7% against advanced economies and 7.6% against EM economies.

The Fed has enhanced existing swap lines and established temporary swap lines with several central banks that previously did not have access to them, such as the Reserve Bank of Australia and the central banks of Brazil and Mexico. Going further beyond arrangements introduced since the GFC, the Fed has also introduced a temporary repo facility that allows foreign monetary authorities to borrow U.S. dollars against Treasury holdings. The potency of this facility will depend in part on its ability to reach central banks that do not have access to have swap lines and have experienced acute funding stresses – notably those in EM.

So far, the combination of these measures appears to have eased the liquidity squeeze and the upward pressure on the dollar in advanced economies. Tracking the impact on emerging markets and against emerging market currencies will be key to gauging the extent of the funding shock throughout the coronavirus crisis.

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