## ch2 ## Source details **Canonical URL:** [ch2](https://www.imf.org/-/media/files/publications/esr/2025/english/ch2.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2025/english/ch2.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2025/english/ch2.pdf.json) --- ### Introduction and chapter focus - The chapter centers on international currencies and payment systems as early signals of broader IMS shifts and proposes new indices to monitor the IMS periodically. - Three main questions addressed: - What were the salient features behind the rise of the US dollar’s dominance and what is its current state? - What economic transformations underlie the dollar-centered IMS and how have they interacted with international currency use? - What are the ongoing evolutions of the IMS? ### Key findings and summary - Dollar dominance and persistence - The dollar’s dominance emerged gradually and has been remarkably resilient, underpinned by the strength of the US economy and the depth of its financial markets. - Geopolitical developments—such as the collapse of the Soviet Union—further entrenched its de facto central role. - Composite index of international currency usage - A new composite index underscores the stability of the dollar’s global role and attests to network externalities and strategic complementarities across the dollar’s international functions. - Global integration, specialization, and measured network shifts - A stable dollar-centered IMS supported deeper global trade and finance integration in the 21st century, contributing to specialization and shifts in country centrality. - New indices measure centrality and asymmetry and show growing asymmetry among economies’ centrality and the international use of their currencies. - Rising asymmetry and monitoring need - The rise in the asymmetry index suggests strong network externalities, reinforcing dollar stability; recent geopolitical and economic developments could weaken these externalities over time. ### The rise and current state of the US dollar - Historical evolution highlights - Late 19th/early 20th century: pound sterling dominated; US dollar rose after WWI as US economic prominence grew. - Bretton Woods institutionalized the dollar as de jure anchor; after 1971 collapse, the dollar became de facto anchor. - Eurodollar market and Federal Reserve swap lines with the BIS in the late-1960s and 1970s supported dollar internationalization. - Collapse of the Soviet Union and integration of former Eastern bloc economies further cemented dollar dominance. - Current state (as of 2023) - The US dollar was dominant across trade, foreign exchange reserves, international loans, international debt, foreign exchange turnover, and global payment. - The dollar’s share in these areas considerably exceeds the US economic weight in global GDP, trade, and finance. - The euro is a distant second with a share also exceeding the euro area’s economic footprint; the Japanese yen follows. ### Index of international currency usage — construction and trends - Index construction - The index is a simple average of each currency's share of: - global disclosed foreign exchange reserves (25 percent weight), - trade invoicing (25 percent weight), - foreign exchange turnover (25 percent weight), - global balance sheets (25 percent weight). - Global balance sheets represent the sum of foreign assets and liabilities (excluding reserves) in each currency over total foreign assets and foreign liabilities. - Empirical trends - The index shows the dollar’s long-standing lead; components confirm the euro, JPY, GBP, and CNY ranking thereafter. - The dollar share remained broadly stable in the 2000s, with a moderate decrease since 2015 reflecting a declining share of the dollar in global reserves. - The euro share increased before the GFC but has declined since. ### Trade and financial globalization, network structure, and centrality - Trade and finance globalization patterns - Between 2001 and the GFC in 2008, global cross-border trade of goods and services rose by about 15 percentage points of global GDP in the lead up to the GFC in 2008. - Since the GFC, global trade has largely plateaued. - Cross-border holdings of financial assets almost doubled as a share of global GDP in the run-up to the GFC, before flattening thereafter. - Network hubs and evolution - 2001: global trade network organized around three main hubs: the United States, the euro area, and Japan. - Recent years: China emerged as the center of the Asian trading hub; global financial network remains centered around advanced economies (United States, euro area, United Kingdom, Hong Kong SAR). - Trade flows and financial holdings have increased within country clusters but remained broadly unchanged across clusters. - Bank deposit and loan claims - The United Kingdom accounts for the largest share with one-fifth of total holdings, followed closely by the United States and the euro area. - These economies hold more than one half of global FDI assets. - Role of offshore financial centers (OFCs) and non-bank financial institutions - The share of OFCs in global cross-border holdings has doubled over the past 30 years. - Cross-border borrowing by non-bank financial institutions has expanded, reflecting their rising role in intermediating global capital flows. ### Centrality and asymmetry indices — measurement and interpretation - Centrality index - Network analysis captures direct and indirect linkages and gives higher weights to linkages with other important economies. - Financial network represents the sum of cross-border holdings of portfolio assets and banks' loans and deposit claims; mirror data are used to fill missing data; portfolio holdings are corrected for the role of OFCs; intra-EMU holdings and trade are excluded. - Overall Asymmetry Index — algebra and use - Definitions and aggregation: - b_{i,t}^T and b_{i,t}^F denote centrality of country i in trade (T) or financial (F) network. - c_{i,t}^T and c_{i,t}^F denote the share of country i’s currency in trade (T) or finance (F) at time t. - X_t = (x_{i,t}) = (b_{i,t}^T, b_{i,t}^F, c_{i,t}^T, c_{i,t}^F). - x̄_{i,t} = 1/4 (b_{i,t}^T + b_{i,t}^F + c_{i,t}^T + c_{i,t}^F). - y_{i,t} = ( (∑_{i=1}^4 |x_{i,t} − x̄_{t}|^2)^{1/2} ) / 2. - Overall asymmetry index Y_t = ∑_{i=1}^6 ω_{i,t} y_{i,t}, where ω_{i,t} is the average of an economy’s share in global trade and finance. - Interpretation: - The index shows a modest increase in asymmetry over much of the sample period, reflecting China’s increasing centrality in trade alongside relatively limited use of the RMB. - Strong network externalities could generate a natural monopoly in currency use; weakening network externalities (e.g., geopolitical fragmentation or diminished capacity of the center country to backstop safe assets) could shift the IMS toward a more symmetric—multipolar—configuration. - A multipolar system could increase global supply of safe assets but could also introduce fragilities (volatile capital flows or exchange rate movements) and higher risk during transitions. - The asymmetry index can help monitor signs of transitions between unipolar and multipolar IMS configurations. ### Four ongoing currents that could influence the IMS - Development 1 — Geopolitical fragmentation - Rising geopolitical fragmentation is reorienting trade flows more within geopolitical groups than between them. - Trade fragmentation has led to reallocation of investment flows, particularly FDI. - Further geopolitical deepening could shrink networks, weaken network externalities, and potentially shift international currency usage. - Development 2 — Increasing RMB use in China’s trade and finance - International use of RMB has more than doubled since 2012 but remains geographically concentrated and a small share of global trade. - Use-share estimated from online forum data reached just over one-quarter of China’s goods trade in 2023. - Policy measures since 2009 supported RMB invoicing; geopolitical factors (e.g., US-China trade tensions) have been key motives for RMB use. - Limitations on RMB internationalization include China’s capital account restrictions and lack of a large and liquid domestic bond market. - Development 3 — Changes in the US role as global banker and insurer - Indicators show tentative signs of relative softening in the US global banker and insurer role: - US treasury premium, - US excess return on external assets, - Demand for gold. - Specific signals: - NIIP has sharply deteriorated in the past decade due to accumulated valuation losses partly explained by strong performance of US equities held by foreigners. - The return differential between overall foreign assets and liabilities has decreased markedly in recent years; returns on the US external balance sheet have been on a low-frequency downward trend for a couple of decades. - The convenience yield on Treasury securities, proxied by the US Treasury premium, has declined markedly in recent years, turning negative across different maturities. - Safe-haven effects in early April 2025 showed the spread between US Treasuries and sovereign bonds of other major advanced economies widened while the US dollar depreciated, suggesting weakened demand for US Treasuries. - Nonetheless, the United States remains the dominant provider of global banker/insurer functions. - Development 4 — Technological innovation and cross-border payments - New rails for cross-border payments are emerging; CBDCs remain experimental for cross-border use. - Crypto assets and stablecoins: - Unbacked crypto assets are highly volatile and used for cross-border transactions by about 90 countries. - Major stablecoin market capitalization has increased almost tenfold since the beginning of 2021, with US-dollar-backed stablecoins accounting for the largest share. - The volume of US Treasuries held by Circle and Tether is comparable to that of large countries, collectively ranking as the 17th largest holder of US Treasuries globally. - Stablecoin market capitalization remains significantly smaller than other dollar-denominated assets, including the size of the Eurodollar deposit. - Risks: - Rising popularity of US-dollar-backed stablecoins could reinforce the dollar’s dominant role, but scale remains modest compared to traditional dollar-denominated assets. - Broader retail adoption of stablecoins without appropriate regulation could bring financial stability and integrity risks and increase likelihood of dollarization in vulnerable countries. ### Policy guidance and monitoring recommendations - Continued monitoring and new indicators - The chapter proposes continued monitoring of the IMS via new indices of international currency usage and an asymmetry index among centralities and currency use. - These indexes, combined with economic and geopolitical indicators, could signal potential changes in the system. - Country-level resilience measures - Countries can enhance resilience by strengthening macroeconomic fundamentals: - building fiscal space; - maintaining credible monetary and exchange rate frameworks; - bolstering external buffers—such as maintaining adequate international reserves and access to financing arrangements under the global financial safety net. ### Notable quantitative and empirical details from chapter boxes and annexes - Index weights and construction - Reserve, trade invoicing, foreign exchange turnover, and global balance sheets components each receive 25 percent weight in the composite index. - RMB invoicing and forum evidence - Share of firms on the platform reporting RMB invoicing reached approximately 25 percent by mid-2024. - Forum data: rerouting share of exporters increased from 6 percent during 2014-2017 to about 10 percent by end-2019; RMB invoicing for rerouting firms rose from 6 percent to 17 percent during 2018–2019. - Global Financial Safety Net (Box 2.2) - Total stock of international reserve holdings reached $14.5 trillion at end-2023. - Size of other GFSN layers grew to about $4.5 trillion. - Global network of BSAs expanded to more than 180 lines by 2021; currently there are 150 swap lines totaling $2 trillion. - The IMF’s total lending capacity now stands at almost $1 trillion; the 16th General Review of Quotas will boost IMF members’ quotas by 50 percent once implemented. - As a share of global external liabilities, the IMF’s lending capacity declined from about 1 percent in early 2000 to about ½ percent today. - Cross-border stablecoin flows (Box 2.4) - 2024 stablecoin flow estimates for USDC and USDT: - Gross stablecoin flows total $2 trillion in 138 million transactions. - Average transaction size is $14,630. - Almost all net flows from North America to other regions total $54 billion. - Swift cross-border payments (Box 2.3) - In 2024, more than two-thirds of financial institution cross-border payment value was intermediated by financial institutions in third-party economies. - For consumer payments, more than one-fifth of cross-border payment value was intermediated. - Share of intermediated financial institution payment value denominated in the US dollar exceeded the average. - Historical and network facts - Between 2001 and the GFC, global cross-border trade rose by about 15 percentage points of global GDP. - The share of OFCs in global cross-border holdings has doubled over the past 30 years. *External Sector Report Chapter 2, IMF | July 2025* ### Introduction ........................................................................................................... ### ch2 - Introduction ........................................................................................................... ### Introduction - The international monetary system (IMS) is a critical foundation of the global economy; a stable IMS provides the orderly underlying conditions necessary for financial and economic stability (IMF 2016). - Since at least the late 19th century, the country at the center has contributed to IMS stability by providing global public goods: promoting open trade and steady capital flows, coordinating macroeconomic policies, and last-resort lending (Kindleberger 1973, 1976, 1981; Koehane 1980). - From the 1940s onwards, that country has been the United States, with the US dollar serving as: - the vehicle for international trade and finance, - the benchmark for exchange rate stabilization, - the global safe asset (Gourinchas 2019; Rey 2024). - The chapter focuses on international currencies and payment systems as an early signal of broader IMS shifts, and proposes new indices to monitor the IMS periodically. - The chapter addresses three main questions: - What were the salient features behind the rise of the US dollar’s dominance and what is its current state? - What economic transformations underlie the dollar-centered IMS and how have they interacted with international currency use? - What are the ongoing evolutions of the IMS? ### Key points and findings (chapter summary) - The dollar’s dominance: - Emerged gradually and has been remarkably resilient, underpinned by the strength of the US economy and the depth of its financial markets. - Geopolitical developments—such as the collapse of the Soviet Union—further entrenched its de facto central role. - Composite index: - A new composite index of international currency usage underscores the stability of the dollar’s global role and attests to network externalities and strategic complementarities across the dollar’s international functions. - Global integration and specialization: - Supported by a stable dollar-centered IMS, global trade and finance achieved remarkable integration in the 21st century. - Economies became increasingly specialized, shifting the centrality of largest economies in trade and finance networks and contributing to growing asymmetry among economies’ centrality and the international use of their currencies. - New indices in the chapter measure centrality and asymmetry. - Rising asymmetry: - The rise in the asymmetry index suggests network externalities remain strong, reinforcing the stability of the dollar-centric IMS and facilitating economic specialization. - Recent geopolitical and economic developments could weaken network externalities over time, warranting close monitoring. ### The Rise of US Dollar Dominance - Historical evolution: - Late 19th/early 20th century: pound sterling was the global reserve currency, with others (e.g., French franc) playing roles (Figure 2.2). - Sterling dominance waned after World War I due to UK fiscal pressures, weakening competitiveness, and war-related debt. - The United States emerged as the world’s largest economy; the US dollar overtook sterling as the leading form of trade credit (Chitu, Eichengreen, and Mehl 2014). - Establishment of the Federal Reserve in 1913 and development of deep, liquid US financial markets increased the dollar’s attractiveness. - Bretton Woods institutionalized the dollar as the de jure anchor currency; after its collapse in 1971 the dollar became the de facto anchor. - The Eurodollar market and Federal Reserve swap lines with the BIS in the late-1960s and 1970s supported dollar internationalization (McCauley and Schenk 2020). - Collapse of the Soviet Union in the late 1980s/1990s and integration of former Eastern bloc economies further cemented dollar dominance. ### Current State: The US Dollar at the Center - As of 2023: - The US dollar was dominant across trade, foreign exchange reserves, international loans, international debt, foreign exchange turnover, and global payment. - The share of the US dollar in these areas considerably exceeds the US economic weight in global GDP, trade, and finance (Figure 2.3). - The euro is a distant second, with a share that also exceeds the euro area’s economic footprint; the Japanese yen follows. ### Global Transformations in the 21st Century: Trade and Financial Liberalization and Globalization - The dollar-centered IMS supported global financial and economic stability and promoted trade and financial liberalization in the 21st century by lowering transaction costs and reducing exchange risks. - Integration and specialization: - Trade and financial liberalization led to deeper global integration and specialization across economies. - This induced shifts in countries’ centrality within global trade and financial networks and increased asymmetry in currency internationalization and network positions. - Measurement: - The chapter introduces indices measuring country centrality and asymmetry in trade and financial networks (visualized across 2001–23 in Figures 2.6–2.11 and summarized in Figures 2.12–2.13). ### Ongoing Developments in the IMS (four currents explored) - Development 1 — Geopolitical fragmentation: - Rising geopolitical fragmentation concerns are reorienting trade flows to occur more within geopolitical groups rather than between them. - Trade fragmentation has led to reallocation of investment flows across countries (Gopinath and others 2025). - Development 2 — Growing use of the renminbi (RMB): - The RMB’s international use in trade and finance is growing. - The motives for currency invoicing choice by firms in China are examined using a large language model analysis of Chinese data. - Policy initiatives and, more recently, geopolitical factors are among key motives for RMB use in trade invoicing (see Box 2.1 and Figures 2.3.1, 2.3.2). - Development 3 — Changes in the US role as global banker and insurer: - Several indicators provide tentative signs of relative softening in the US global banker and insurer role: - US treasury premium, - US excess return on external assets, - Demand for gold. - Nonetheless, the United States remains the dominant provider of global banker/insurer functions. - Development 4 — Technological innovation and cross-border payments: - New rails for cross-border payments are emerging. - Central bank digital currencies (CBDCs) are still experimental for cross-border use. - International use of private crypto assets—especially stablecoins backed by US dollars—has been increasing. - Indicators confirm their growing presence; rising popularity of US-dollar-backed stablecoins could reinforce the dollar’s dominant role, although: - Their scale remains modest compared to traditional dollar-denominated assets. - Broader retail adoption could bring financial stability risks (Figures 2.16–2.17, Boxes 2.3–2.4). ### Conclusion - The dollar-centric IMS has been stable and resilient, underpinned by network externalities, complementarities across the dollar’s international functions, and the depth and liquidity of US financial markets. - Recent geopolitical and economic developments could weaken network externalities and lead to gradual reshaping of the IMS, with potential far-reaching implications. - Given these dynamics and the IMF’s mandate to ensure an effectively operating IMS (IMF 2011, 2012, 2016), the chapter proposes new indices and establishes a framework for periodic monitoring focused on international currencies and payment systems. *External Sector Report Chapter 2, IMF | July 2025* ### 2. Share of Anchor Currency over Time ### 2. Share of Anchor Currency over Time ### The rise and persistence of US dollar dominance - The dollar has maintained a dominant role in international currency usage, followed by the euro, the Japanese yen, the British pound, and the RMB. - The dollar share has remained broadly stable in the 2000s, with a moderate decrease since 2015 reflecting a declining share of the dollar in global reserves (Arslanalp, Eichengreen, and Simpson-Bell 2022). - The euro share increased in the run-up to the global financial crisis (GFC) but has declined since. - Strategic complementarities across currency functions underpin dollar inertia: widespread use to invoice and settle cross-border trade; prevalence of dollar pegs; firm-level complementarities in price setting; and deep, liquid US financial markets and US Treasuries’ role as safe assets. - Mutually reinforcing dynamics: greater dollar use in trade incentivizes holding dollar-denominated assets and issuing dollar liabilities; larger stocks of dollar reserves and a more stable dollar exchange rate make invoice/borrowing in dollars more appealing. ### Index of international currency usage — construction and trends - The index is a simple average of each currency's share of: - global disclosed foreign exchange reserves (25 percent weight), - trade invoicing (25 percent weight), - foreign exchange turnover (25 percent weight), - global balance sheets (25 percent weight). - Global balance sheets represent the sum of foreign assets and liabilities (excluding reserves) in each currency over total foreign assets and foreign liabilities. - The index shows the dollar’s long-standing lead; the index components confirm the euro, JPY, GBP, and CNY ranking thereafter. ### Trade and financial globalization and implications for the IMS - Between 2001 and the GFC in 2008, global cross-border trade of goods and services rose by about 15 percentage points of global GDP in the lead up to the GFC in 2008. - Since the GFC, global trade has largely plateaued. - China has become a key participant in global trade alongside the United States and the euro area; other emerging market economies in Asia—notably India—have also gained prominence. - Cross-border holdings of financial assets almost doubled as a share of global GDP in the run-up to the GFC, before flattening thereafter. - Advanced economies—particularly the United States, the euro area, and the United Kingdom—continue to account for the bulk of cross-border holdings of portfolio and banking assets. - Looking at deposit and loan claims of banks: - The United Kingdom accounts for the largest share with one-fifth of total holdings, - followed closely by the United States and the euro area. - These economies also hold more than one half of global foreign direct investment (FDI) assets. - China has become an increasingly important source of FDI, with large exposure intermediated through Hong Kong Special Administrative Region. ### Role of offshore financial centers (OFCs) and non-bank financial institutions - The share of OFCs in global cross-border holdings has doubled over the past 30 years. - Complex multinational corporate structures complicate attribution of bilateral financial holdings; reallocating holdings through OFCs can change bilateral exposures and aggregate foreign holdings (for example, foreign holdings of the United States decrease when looking through OFCs, while overall foreign holdings increase in the euro area and the United Kingdom). - Cross-border borrowing by non-bank financial institutions has expanded, reflecting their rising role in intermediating global capital flows. ### Network structure and evolving hubs - In 2001 the global trade network was organized around three main hubs: the United States, the euro area, and Japan. - In recent years, China has emerged as the center of the Asian trading hub, resulting in a more concentrated network structure anchored around a few large poles. - The global financial network remains centered around advanced economies—notably the United States, the euro area, the United Kingdom, and Hong Kong Special Administrative Region—although several other Asian economies have gained importance. - Over time, trade flows and financial holdings have increased within country clusters but remained broadly unchanged across clusters. ### Key data and methodological notes - Sources cited in the chapter: extension of Eichengreen, Chitu, and Mehl (2016) using Currency Composition of Official Foreign Exchange Reserves data set; Jordà, Schularick, and Taylor (2017); Ilzetzki, Reinhart, and Rogoff (2019); IMF staff calculations; Allen and Juvenal (2025); Boz and others (2022, 2025) and IMF staff calculations; External Wealth of Nations database (2025); Eurostat; HM Revenue & Customs. - Note: In the index and reserve series, other currencies include Australia, Brazil, Canada, Egypt, India, Mexico, New Zealand, the Russian Federation, Singapore, South Africa, Switzerland, and Türkiye, and also special drawing rights. - Abbreviations preserved exactly as in source: DEM = Deutsche mark; EUR = euro; FRF = French franc; GBP = British pound sterling; JPY = Japanese yen; OTH = other currencies; USD = US dollar; CNY = Chinese yuan. - Index excludes intra-euro area holdings. *External Sector Report Chapter 2 — IMF | July 2025* ### Annex Figure 2.3.7). ### Annex Figure 2.3.7) ### Network evolution: trade and financial centrality - The United States has become more central in the financial network, reflecting larger foreign holdings of US portfolio and banking assets, whereas its dominance in the trade network has declined. - Japan has become more central in the financial network, driven by an increase in foreign investment in the Japanese banking sector, while its centrality in the trade network has declined. - The euro area and the United Kingdom have experienced a decline in their centrality in both trade and financial networks. - China has substantially increased its role in the global trade network, though its role in the financial network remains limited. - Figure 2.10 covers country centrality in trade and financial networks over 2001–23 (each dot represents the annual value of the centrality measure). ### Text Box 2.1 — centrality index and network analysis - Network analysis captures direct and indirect linkages and gives higher weights to linkages with other important economies. - The centrality index quantifies the importance of each economy (“node”) in the network, reflecting both direct and indirect linkages. - “Financial network” represents the sum of cross-border holdings of portfolio assets and banks' loans and deposit claims; mirror data are used to fill missing data whenever available; portfolio holdings are corrected for the role of offshore financial centers using the rescaling matrix of Coppola and others (2021); intra-European Monetary Union holdings and trade are excluded. ### Asymmetry between economic centrality and currency use - Currency shares have remained broadly stable while centrality of major economies evolved, producing asymmetry between economic centrality and currency use. - Examples: - Decreased centrality of the United States and the euro area in trade increased asymmetry with their currency shares, which remained broadly stable. - Rise in China’s centrality in trade and finance has outpaced the increase in the use of RMB. - Aggregated asymmetries generate a global measure: Figure 2.12.1 shows a steady increase in asymmetry in trade but stability in finance; Figure 2.12.2 shows increasing asymmetry between trade and finance centralities that contrasts with a near constant asymmetry between currency use in trade and finance. - A fully symmetrical benchmark is a configuration where a country has equal centrality in trade and finance and its currency is used proportionally in cross-border transactions. ### Text Box 2.2 — Overall Asymmetry Index (algebra) - Definitions: - Let b_{i,t}^T and b_{i,t}^F denote centrality of country i in trade (T) or financial (F) network. - Let c_{i,t}^T and c_{i,t}^F denote the share of country i’s currency in trade (T) or finance (F) at time t. - i = United States, euro area, United Kingdom, China, Japan, and Rest of the World. - Each centrality and currency share is bounded between 0 and 1 and sum to 1 across the six economies. - Vector and aggregation: - X_t = (x_{i,t}) = (b_{i,t}^T, b_{i,t}^F, c_{i,t}^T, c_{i,t}^F). - x̄_{i,t} = 1/4 (b_{i,t}^T + b_{i,t}^F + c_{i,t}^T + c_{i,t}^F). - y_{i,t} = ( (∑_{i=1}^4 |x_{i,t} − x̄_{t}|^2)^{1/2} ) / 2 , which measures the distance from the main diagonal in 4-dimensional space. - Overall asymmetry index Y_t = ∑_{i=1}^6 ω_{i,t} y_{i,t}, where ω_{i,t} is the average of an economy’s share in global trade and finance. ### Interpretation and implications of the asymmetry index - The index indicates a modest increase in asymmetry over much of the sample period, reflecting in part China’s increasing centrality in trade alongside relatively limited use of the RMB in trade. - Network externalities strong enough could generate a natural monopoly in currency use (one vehicle currency); conversely weakening network externalities (e.g., geopolitical fragmentation or diminished capacity of the center country to backstop safe assets) could shift the IMS toward a more symmetric—multipolar—configuration. - A multipolar system could increase global supply of safe assets by using multiple suppliers, enhancing stability, but could also introduce fragilities (volatile capital flows or exchange rate movements) and higher risk during transitions between configurations. - The asymmetry index can help monitor signs of transitions between unipolar and multipolar IMS configurations. ### Ongoing developments that could influence the IMS - Four currents discussed as potentially material if sustained: rising geopolitical fragmentation; increasing RMB use in China’s trade and finance; changes in the US dollar’s role as global safe asset; cross-border payments and digital innovation. Subsection: Rising concerns on geopolitical fragmentation - Brexit, rising trade tensions, and Russia’s invasion of Ukraine have intensified geopolitical tensions and increased barriers to trade, including trade-restrictive measures and distortive subsidies. - Global trade is increasingly taking place within geopolitical groups of countries rather than between them (IMF 2025). - Recent research highlights a reallocation of investment flows—particularly FDI—in response to increasing trade barriers (Gopinath and others 2024, 2025). - Geopolitical fragmentation has entrenched a retreat from cross-border economic integration that began after the GFC (Gopinath and others 2025). - Were geopolitical tensions to rise further and deepen trade and financial fragmentation, networks would shrink and network externalities could weaken, potentially shifting international currency usage. - Notes: - In comprehensive bilateral balance-of-payments data, similar evidence documented in Box 1.1 of the 2024 External Sector Report. - Despite the decline in inter-bloc trade, aggregate trade as a share of global GDP remained constant; bilateral gross financial holdings have so far remained broadly stable and net international investment positions between large creditor and debtor economies has changed little so far. Subsection: Increasing RMB use in China’s trade and finance - The international use of RMB has more than doubled since 2012, though it remains geographically concentrated in China’s trading partners and only accounts for a small share of global trade. - Use-share estimated from online forum data reached just over one-quarter of China’s goods trade in 2023. - Policy measures since 2009 promoted RMB use for trade invoicing and settlement: 2009 pilot program allowed designated foreign banks to access onshore RMB; later a Cross-border Interbank Payment System and swap lines with the People’s Bank of China were introduced. - Geopolitical factors, including escalating trade tensions, have been frequently cited by Chinese firms as key reasons for shifting to the RMB in trade. - RMB adoption in international bank credit has broadened as Chinese banks play a more prominent role in global financing. - Limitations on RMB internationalization include China’s capital account restrictions and lack of a large and liquid domestic bond market. - The share of RMB in global allocated reserve assets has remained relatively low and stable (Arslanalp, Eichengreen and Simpson-Bell 2022). Subsection: The US dollar as global safe asset - Dollar-denominated safe assets—mostly debt claims—deliver relatively higher returns during global downturns, providing a secure store of value. - Demand for US assets has relaxed the US external constraint (“exorbitant privilege”), reflected in consistent positive valuation gains on its net external assets, an excess return of its foreign assets over its foreign liabilities, and a convenience yield for Treasury securities until recently. - Recent signals of weakening of US “exorbitant privileges and duties”: - The net international investment position (NIIP) has sharply deteriorated in the past decade due to accumulated valuation losses partly explained by strong performance of US equities held by foreigners. - The return differential between overall foreign assets and liabilities has decreased markedly over recent years; returns on the US external balance sheet have been on a low-frequency downward trend for a couple of decades. - The convenience yield on Treasury securities, proxied by the US Treasury premium, has declined markedly in recent years, turning negative across different maturities. - Potential explanations for convenience-yield decline include large increase in debt issuances or structural factors from regulatory changes since the GFC; US government debt has risen to a historically high level and is projected to increase further (IMF 2025). - Safe-haven effects in 2025 showed anomalous movements: in early April 2025, during heightened global uncertainty, the spread between US Treasuries and sovereign bonds of other major advanced economies widened and the US dollar depreciated, suggesting weakened demand for US Treasuries; possible drivers include concerns about US fiscal trajectory, rising US policy uncertainty, or investor portfolio diversification. - Developments so far may be transient: dollar depreciation has been smooth and moderate, only partially reversing appreciation since 2021, and yields on US Treasuries remain relatively low by historical standards. Subsection: Cross-border payments and digital innovation - Cross-border payments rely on correspondent banks, messaging systems (including SWIFT), money transfer operators, credit card networks, foreign exchange markets, and central bank arrangements; current correspondent-bank-based settlement leads to high transaction costs and lengthy processing times for less integrated countries. - Advances in digital technology (tokenization, encryption, programmability) enable alternative cross-border payment arrangements: CBDCs (public) and stablecoins (private). - As of the cited survey, 81 out of 86 surveyed central banks are exploring or piloting CBDC, either retail or wholesale, or both. - No existing CBDC can yet be used for cross-border payments, though explorative projects are ongoing. - Crypto asset landscape: - Unbacked crypto assets (majority of private crypto market capitalization; largest are Bitcoin and Ether) are highly volatile and used for cross-border transactions by about 90 countries; amounts are sizable in some countries; limited evidence of substitution between fiat-based and crypto-based cross-border flows. - Stablecoins (backed crypto assets) aim to anchor value by holding reserves; major stablecoin market capitalization has increased almost tenfold since the beginning of 2021, with US-dollar-backed stablecoins accounting for the largest share. - US-dollar-backed stablecoins could perform many functions of the US dollar as international currency; preliminary evidence points to foreign demand for US-dollar-backed stablecoins broadly mirroring traditional drivers of demand for US dollar-denominated assets. - The volume of US Treasuries held by Circle and Tether is comparable to that of large countries, collectively ranking as the 17th largest holder of US Treasuries globally. - However, stablecoin market capitalization remains significantly smaller than other dollar-denominated assets, including the size of the Eurodollar deposit. - Risks of broader stablecoin adoption without proper regulation: - Potential to reinforce the US dollar’s dominant role in the IMS and increase demand for US Treasuries unless other-currency stablecoins expand faster. - Unlike Eurodollar deposits, stablecoins do not route through financial intermediaries and issuers often lack access to central bank liquidity or regulatory oversight in many countries. - Broader, unregulated adoption could increase likelihood of dollarization and currency substitution for vulnerable countries and raise financial integrity risks. *Source: ch2 - Annex Figure 2.3.7). PDF chapter from External Sector Report Chapter 2, IMF | July 2025* ### Conclusion ### Conclusion ### Dominance of the US dollar: overview and persistence - The US dollar has dominated the IMS in trade, finance, reserve currency, and global payments over recent decades. - The share of the US dollar in these areas had considerably exceeded the US economic weight in global GDP, trade, and finance. - Dollar dominance has endured through major shifts in the global economy, including the end of the Bretton Woods era triggered by a run on the dollar. - Persistence of dollar dominance is underpinned by: - network externalities; - complementarities among various uses of the dollar; - the dollar’s safe asset status; - the unmatched depth of US financial markets. - These factors are characterized as “hard to displace.” ### Emerging trends with potential implications for international currency use - Identified trends that could impact the IMS: - increasing geopolitical fragmentation concerns; - greater use of RMB in international trade and finance; - a softening in the United States’ role as world banker and insurer; - the emergence of alternative payment systems and private digital assets. - Assessment: - None of these trends are judged to be set to alter the central role of the US dollar in the near term, in part due to: - unmatched depth of US financial markets; - a fragmented capital, banking and broader EU single market; - the presence of capital account restrictions in China. - However, these trends could eventually catalyze a gradual reconfiguration of the use of international currencies. ### Monitoring, measurement, and system indicators - The chapter proposes continued monitoring of the IMS, including: - new indexes of international currency usage; and - an index of the asymmetry among centralities and currency use. - The asymmetry index, combined with economic and geopolitical developments, could signal potential changes in the system. ### Policy guidance to enhance country resilience - Countries can enhance resilience by strengthening macroeconomic fundamentals, including: - building fiscal space; - maintaining credible monetary and exchange rate frameworks; - bolstering external buffers—such as maintaining adequate international reserves and access to financing arrangements available under the global financial safety net. ### Supplementary findings from boxes in the chapter - Box 2.1 — Rising RMB Use in Trade Invoicing and Its Drivers - Data and method: - Leverages a novel data set of textual data from a large online forum on international trade in China, merged with Chinese customs data. - Uses natural language processing (NLP) models to extract firms’ currency invoicing decisions and reasons for using RMB. - Aggregate pattern: - Share of firms on the platform reporting RMB invoicing for trade has shown a steady upward trend since 2009 and reached approximately 25 percent by mid-2024. - The US dollar remains the most used currency by Chinese firms for trade invoicing; the euro remained relatively moderate. - Drivers over time: - 2009–2012: initial increases largely policy-driven (pilot program in 2009 reduced transaction costs for RMB settlement); state-owned firms were early adopters. - 2015–2016: exchange rate volatility concerns became major reasons for adopting RMB after a new exchange rate mechanism in 2015. - 2018–2022: geopolitical concerns, especially US-China trade tensions since 2018, drove increased RMB invoicing. - Forum data: share of Chinese exporters engaged in rerouting increased from 6 percent during 2014-2017 to about 10 percent by the end of 2019. - During 2018–2019, RMB invoicing increased from 6 percent to 17 percent for rerouting firms; RMB adopters among rerouting firms tended to have stronger trade links with Asian countries. - 2022: Russia’s invasion of Ukraine and Western sanctions (including Swift exclusions) positioned the RMB as a viable alternative for Chinese firms trading with Russia; forum data indicate firms trading with Russia adopted or switched to RMB. - Data limitations noted: - Forum data infer whether a firm uses RMB in trade invoicing but cannot determine if it is the sole invoicing currency. - Forum data lack information on the value of exports denominated in RMB, which could explain discrepancies with official statistics. - Box 2.2 — Global Financial Safety Net (GFSN) - Role: - The GFSN provides insurance for countries against a crisis and supplies financing when crises hit. - Expansion since 2000: - Total stock of international reserve holdings increased more than six times, reaching $14.5 trillion at the end of 2023. - Size of other GFSN layers grew nearly 20 times, to about $4.5 trillion. - Growth reflects expansion of bilateral swap lines (BSAs), expansion of Chinese BSAs, and large scaling-up of the IMF’s lending capacity and Regional Financial Arrangements (RFAs) during the GFC and the European debt crisis. - Swap lines: - Global network of BSAs expanded from six swap lines among advanced economy central banks in the early 2000s to more than 180 lines by 2021. - Some pandemic-related lines expired; currently there are 150 swap lines in existence totaling $2 trillion. - Since 2009, rapid expansion of Chinese BSAs partly reflects China’s efforts to promote RMB internationalization. - The IMF: - The IMF has near-universal membership and its total lending capacity has risen significantly since the GFC and now stands at almost $1 trillion. - The recently approved 16th General Review of Quotas will boost IMF members’ quotas by 50 percent once implemented. - As a share of global external liabilities, the IMF’s lending capacity declined from about 1 percent in early 2000 to about ½ percent today. - Usage patterns in crises: - Drawdowns of US dollar swap lines were important in the early stages of the COVID-19 crisis. - Demand for IMF lending has remained consistently high since the height of the pandemic. - RFAs took on larger roles in regionally concentrated crises (e.g., euro area crisis), complemented by IMF lending. - During the pandemic, countries were unwilling or did not deem it necessary to make significant drawdowns of FX reserves prior to 2022, partly reflecting earlier unwinding of supports and more extensive swap line availability. - Box 2.3 — Patterns in Cross-Border Payments via Swift - Data and scope: - Uses Swift messaging data on cross-border payments for 2021–24; focuses on financial institution gross cross-border payments and customer cross-border payments. - Three key stylized facts: - In 2024, more than two-thirds of the financial institution cross-border payment value was intermediated by financial institutions in third-party economies—including the United States, Germany, Canada, and the United Kingdom. - For consumer payments, more than one-fifth of the cross-border payment value was intermediated. - The share of intermediated financial institution payment value denominated in the US dollar exceeded the average; the reverse was true for other SDR basket currency transactions. - Network structure: - Cross-border payment networks are highly interconnected with a core-periphery structure. - Economies with the highest centrality are predominantly major advanced economies and financial centers. - The United States and the United Kingdom rank the highest in centrality for customer payments and financial institution payments, respectively. - Trends 2021–2024: - Connectivity among economies increased, with a growing number of links per node. - The increase was particularly pronounced for payments in RMB, though from a low base. - Determinants (gravity estimation for 187 beneficiary economies): - Bilateral cross-border payments correlate strongly with informational proximity and economic ties. - Payments are higher between geographically closer economies. - Greater bilateral imports, portfolio investment, and foreign direct investment are associated with higher payment values. - Heterogeneity by payment type: - Distance is crucial for customer payments but less so for financial institutions’ payments. - Economic ties (especially investment) are positively associated with both financial institution and customer payments. - Smaller payments are more sensitive to common language and colonial ties; larger payments are more associated with economic relationships. - Box 2.4 — Measuring International Stablecoin Flows - Context: - Stablecoins aim to maintain a stable value, typically relative to the US dollar. - By some estimates, stablecoin capital flows exceeded Bitcoin capital flows by two to four times in 2023. - Method (Reuter 2025): - Step 1: construct a training sample of wallets with reliably identified geographic locations; validate via local time-zone activity profiles. - Step 2: train a machine learning model to recognize regional activity patterns and infer geographic locations of other wallets. - 2024 stablecoin flow estimates for USDC and USDT: - Gross stablecoin flows total $2 trillion in 138 million transactions. - Average transaction size is $14,630. - Geographic patterns: - North America and Asia and Pacific account for the largest fraction of gross flows, followed by Europe, Africa and Middle East, and Latin America and the Caribbean. - Relative to regional GDP, flows from Africa and Latin America are larger than in other regions. - Flows are predominantly inter-regional. - Bilateral net flows: - Almost all net flows are from North America to other regions totaling $54 billion. - Net flows from Africa, Asia, and Latin America into Europe are observed, consistent with evidence of crypto assets facilitating capital flight in some cases. - Data scope note: - Analysis covers stablecoin flows on Ethereum, Binance Smart Chain, Optimism, Arbitrum, Base, and Linea; estimates are a lower bound for total stablecoin flows in 2024. *External Sector Report Chapter 2 — IMF | July 2025* ### 2025. Unpublished. ### ch2 - 2025. Unpublished. ### Major research themes represented in the chapter's references - International currency hierarchy and the role of the US dollar, euro, and renminbi in reserve holdings and invoicing. - Cross-border crypto flows, stablecoins, and crypto as a channel for capital flight. - Global cross-border payments architecture and scale (including characterization as a $1 Quadrillion evolving market). - Safe assets, sovereign risk, and the “exorbitant privilege” / “exorbitant duty” literature on US external adjustment and public debt sustainability. - Network analysis of international finance and trade: capital flows, FDI networks, and trade invoicing. - Central bank instruments and responses: CBDC adoption surveys, central bank swap lines, and reserve currency datasets. - Historical and theoretical perspectives on international monetary systems, hegemonic stability, and currency transitions. ### Representative works and their focal points (selected items and exact identifiers) - Cardozo Pamela, Andrés Fernández, Jerzy Jiang, and Felipe Rojas. 2024. “On Cross-Border Crypto Flows: Measurement Drivers and Policy Implications.” IMF Working Paper 24/261. - Cerutti, Eugenio, Jiaqian Chen, and Martina Hengge. 2024. “A Primer on Bitcoin Cross-Border Flows: Measurement and Drivers.” IMF Working Paper 24/085. - Cerruti, Eugenio, Melih Firat, and Martina Hengge. 2025. “Global Cross-Border Payments: A $1 Quadrillion Evolving Market?” IMF Working Paper 25/120. - Graf von Luckner, Clemens M., Robin Koepke, and Silvia Sgherri. 2024. “Crypto as a Marketplace for Capital Flight.” IMF Working Paper 24/133. - Di Lorio, Alberto, Anneke Kosse, and Ilaria Mattei. 2024. “Embracing Diversity, Advancing Together—Results of the 2023 BIS Survey on Central Bank Digital Currencies and Crypto.” BIS Papers 147. - European Central Bank (ECB). 2025. “The International Role of the Euro.” June. - Goldberg, Linda S., and Oliver Zain Hannaoui. 2024. “Drivers of Dollar Share in Foreign Exchange Reserves.” Staff Report 1087, Federal Reserve Bank of New York. - Jiang Zhengyang, Arvind Krishnamurthy, and Hanno Lustig. 2024. “The Rest of the World’s Dollar-Weighted Return on US Treasurys.” IMF Economic Review 72 (4): 1320–46. - Gourinchas, Pierre-Olivier, and Hélène Rey. 2007a. “From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege.” In G7 Current Account Imbalances: Sustainability and Adjustment. - Rey, Hélène. 2024. “Strengths and Flaws of the Dollar-Based System.” In Floating Exchange Rates at Fifty, Part V, 24. - Triffin, Robert. 1966. “The Balance of Payments and the Foreign Investment Position of the United States.” Essays in International Finance 55. ### Methodological and data emphases visible in the citations - Use of network analysis and large-network community-detection methods (e.g., Clauset, Newman, and Moore 2004). - Product-level international trade data (BACI) and CEPII working papers (Gaulier and Zignago 2010; De Benedictis et al. 2013). - BIS and IMF statistical perspectives on currency internationalization, central bank swap arrangements, and cross-border financial flows. - Microdata and survey-based insights for CBDC and crypto adoption (BIS Papers 147; PBoC RMB Internationalization Report 2023 referenced). - Working papers and journal articles combining theory and empirical analysis on safe asset demand, return differentials, covered interest parity deviations, and exchange arrangement choices. ### Cross-cutting policy and analytical motifs (inferred from referenced literature) - Policy implications for measurement and regulation of crypto cross-border flows and stablecoins. - Implications of currency composition of reserves for global financial stability and exchange rate dynamics. - Role of cross-border banking and capital flow networks in shaping dominant currency status and financial contagion. - Historical precedents and institutional reforms for the international monetary system, including discussions of SDRs and swap arrangements. --- _Source: https://www.imf.org/-/media/files/publications/esr/2025/english/ch2.pdf_