Dollar Dominance in FX Trading

Item Type Conference or Workshop Item (Paper)
Abstract Over 85% of all foreign exchange (FX) transactions involve the US dollar. I argue that the US dollar dominates FX trading volume because of strategic avoidance of price impact. To show this, I leverage the fact that non-dollar currency pairs can be traded indirectly by using the US dollar as an intermediate vehicle currency. I present a model of FX trading that embraces this idea and derive a set of sufficient conditions for dollar dominance. I then empirically test these conditions using a globally representative FX trade data set and provide evidence that is consistent with my model. To establish causality, I employ a systematic approach to identify quasi-exogenous spikes in the sufficient conditions. Lastly, I use non-overlapping holidays as a novel identification tool to show that up to 36-40% of the daily volume in dollar currency pairs are due to vehicle currency trading.
Authors Somogyi, Fabricius
Language English
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area SOF - System-wide Risk in the Financial System
Date October 2021
Event Title 27th Annual Meeting of the German Finance Association (DGF)
Event Location Innsbruck
Event Dates 01 Oktober 2021
Depositing User Fabricius Somogyi
Date Deposited 14 Oct 2021 15:11
Last Modified 20 Jul 2022 17:46


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Somogyi, Fabricius: Dollar Dominance in FX Trading. 2021. - 27th Annual Meeting of the German Finance Association (DGF). - Innsbruck.

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