Dollar Dominance in FX Trading
Type
conference paper
Date Issued
2021-10
Author(s)
Abstract (De)
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.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Event Title
27th Annual Meeting of the German Finance Association (DGF)
Event Location
Innsbruck
Event Date
01 Oktober 2021
Division(s)
Eprints ID
264589
File(s)![Thumbnail Image]()
open.access
Name
Somogyi_JMP2021_DollarDominanceInFXTrading.pdf
Size
1.86 MB
Format
Adobe PDF
Checksum (MD5)
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