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Dollar dominance: A source of dollar volatility?

Author

Listed:
  • Cara Bordier
  • Lukas Frei
  • Simon Stalder

Abstract

The US dollar (USD) is involved in 88% of global foreign exchange transactions, partly due to its role as a vehicle currency. Using high-frequency data from primary interdealer platforms, we develop a novel methodology to identify USD cross-trades. We show both theoretically and empirically that such trades can generate price fluctuations in USD exchange rates. Employing an instrumental variables approach, we find that increased cross-trading activity amplifies aggregate USD volatility. These results highlight a fundamental trade-off: while dollar dominance enhances market liquidity, it also increases the currency’s exposure to shocks originating in other currency pairs.

Suggested Citation

  • Cara Bordier & Lukas Frei & Simon Stalder, 2026. "Dollar dominance: A source of dollar volatility?," Working Papers 2026-05, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2026-05
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_05
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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