The global dominance of the U.S. dollar has long shaped international trade, financial markets, and geopolitical power. Amid shifting global dynamics and the rapid development of stablecoins and other digital assets, new questions are emerging around the structure and evolution of dollar hegemony. How are technological innovation and geopolitical change reshaping the international monetary system, and what possibilities lie ahead?

Recorded on April 8, 2026, this panel brought together scholars to examine the foundation of U.S. monetary influence and the role of financial innovation in an evolving global economy. The panel featured Barry Eichengreen, George C. Pardee & Helen N. Pardee Chair and Distinguished Professor of Economics and Political Science at UC Berkeley, Rohan Kekre, Assistant Professor of Finance at UC Berkeley Haas, and Chenzi Xu, Assistant Professor of Economics at UC Berkeley. Brian Judge, Research Director for the UC Berkeley Program on Finance and Democracy at BESI, moderated.

Matrix on Point is a discussion series promoting focused, cross-disciplinary conversations on today’s most pressing issues. Offering opportunities for scholarly exchange and interaction, each Matrix On Point features the perspectives of leading scholars and specialists from different disciplines, followed by an open conversation. These thought-provoking events are free and open to the public.

Podcast and Transcript

Watch the panel above or on YouTube. Or listen to the audio recording via the Matrix Podcast below (or on Apple Podcasts).

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[MARION FOURCADE]

Hi everyone. It is 12:10, so we’re on Berkeley time. My name is Marion Fourcade.

I’m the Director of Social Science Matrix. I’m delighted to welcome you for this panel on The U.S. Dollar Hegemony in Transition.

The global dominance of the U.S. dollar has long served as the bedrock of international trade and the primary instrument of American geopolitical power. For decades, this privilege has allowed the United States to shape financial markets and project influence across the globe.

And yet today, we find ourselves at a potential inflection point. New monetary instruments backed by technology, declining trust in the U.S. as a global power, and shifting geopolitical strategies amid escalating conflict are forcing us to ask whether the era of unquestioned U.S. dollar hegemony might be coming to an end.

Providing some insight will be the work of today’s panel. You know, we have the best experts, seriously, the best experts in the field. But before I introduce the panel, let me say a few things.

First, today’s event was co-organized with Matilde Bombardini and Cecile Gaubert from the Clausen Center. It is… And they are here, both of them.

Hello. It is co-sponsored by the Institute for International Studies, the Berkeley Economy and Society Initiative, the Program on Finance and Democracy, and the UC Departments of Economics and Political Science.

As always, I will announce some upcoming events. Tomorrow we have a great event at Matrix on Charles Briggs from anthropology, his new book on the communication between patients and doctors in U.S. emergency rooms. And then I’ll let you look at the rest of the events for the remaining weeks of the semester.

And now let me introduce our moderator, Brian Judge. Brian is the research director of the Berkeley Program on Finance and Democracy at BESI, where he leads research on how finance drives inequality and erodes democratic governance.

His current work focuses on central bank digital currencies and using large language models to demystify public budget documents. His first book, Democracy in Default, Finance and the Rise of Neoliberalism in America, came out from Columbia University Press in 2024, and it explores how finance reshaped American political economy. His next book project is titled The Economy of Knowledge, and that book examines how economic knowledge both constructs and constraints what can be known about what we call the economy. He has published widely in political economy and political science.

He holds a PhD in political science from here and was a policy fellow at the Center for Human Compatible AI before his current job at the Center of Finance and Democracy. And before academia, he was a portfolio analyst at a hedge fund. So, without further ado, let me turn it over to Brian.

Thank you for being here.

[BRIAN JUDGE]

Great. Well, thank you, Marion, for that wonderful introduction. It’s a real pleasure to have the chance to moderate this discussion today.

And so as Marianne said, we just have this outstanding panel, and I’m very excited to introduce them and get started into the discussion. So each speaker will have about fifteen minutes, and then I’m going to ask a few questions, and then we’ll open it up for audience questions.

So before we start, I just want to just quickly mention something that has been kind of banging around the discourse recently that I think is worth kind of framing the discussion in some sense. So Herodotus, in his Histories, tells the story of Croesus, the king of Lydia and the father of standardized coinage, who sent lavish gifts to the oracles at Delphi and asked whether he should attack Persia.

The Pythia responded that if he crossed the river, he would destroy a great empire. He also asked whether his rule would be long-lasting, and the oracle told him to beware when a mule became the king of the Medes. And counterpoint, 2,500 or many thousands of years later in the Financial Times this morning, a headline: Iran demands crypto fees for ships passing through Hormuz.

So with that, I’d like to introduce our three wonderful panelists.

So first, we have Barry Eichengreen. Barry is the George C. Pardee and Helen N. Pardee Chair and Distinguished Professor of Economics and Political Science at UC Berkeley, where he has taught since 1987.

He is a research associate of the National Bureau of Economic Research and a research fellow of the Center for Economic Policy Research. In 1997-1998, he was the senior policy advisor at the International Monetary Fund and is a fellow of the American Academy of Arts and Sciences. Professor Eichengreen is the convener of the Bellagio Group of academics and economic officials, and the chair of the Academic Advisory Committee of the Peterson Institute of International Economics.

He has held Guggenheim and Fulbright fellowships, and he has been a fellow of the Center of Advanced Study in the Behavioral Sciences and the Institute of Advanced Study in Berlin. He is a regular monthly columnist for Project Syndicate, and his books include The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era, How Global Currencies Work: Past, Present, and Future with Livia Chițu and Arnaud Mehl, and The Korean Economy: From a Miraculous Past to a Sustainable Future. Renminbi Internationalization. Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and Misuses of History.

And the most recently published, which you should all go out and purchase immediately, Money Beyond Borders: Global Currencies from Croesus to Crypto. So go out and buy it as soon as possible.

So he was awarded the Economic History Association’s Jonathan R.T. Hughes Prize for Excellence in Teaching in 2002, and the UC Berkeley Social Science Division’s Distinguished Teaching Award in 2004. He’s also the recipient of a Doctor Honoris Causa from the American University in Paris.

To his left is Chenzi Xu, who’s an assistant professor of economics with research at the intersection of finance, international economics, and economic history.

Her work focuses on the relationship between financial institutions and the flow of capital and goods, with particular interest in understanding how historical events shape and impact modern outcomes. Prior to joining UC Berkeley, she was an assistant professor of finance at Stanford University’s Graduate School of Business, and she holds both a BA and PhD from Harvard in economics as well as an MPhil from the University of Cambridge in economic history, where she was a William Shirley Scholar at Pembroke College and a Cambridge Overseas Trust Scholar.

And then to her left is Rohan Kekre, whose research interests are at the intersection of macroeconomics and finance, with a particular focus on international finance. Among other topics, he has studied the drivers of exchange rates and interest rates, the transmission of monetary policy through financial markets, and the unique roles of the United States in the international financial system.

His papers have been published in leading journals such as the American Economic Review, Econometrica, and the Review of Economic Studies. Prior to joining UC Berkeley Haas, he served on the faculty at the University of Chicago Booth School of Business and received his AB, AM, and PhD from Harvard University.

So, to start, we’ll turn the floor over to Professor Eichengreen.

[BARRY EICHENGREEN]

So, thank you, Marion. Exorbitant privilege sounds better in French than it does in English. Thank you, Brian.

The last time I saw Brian, we were snowshoeing in Lapland, but that’s another story. I think the point of departure for this panel ought to be the observation that how remarkable it is, that the dollar is used so widely worldwide for all manner of commercial and financial transactions.

The U.S. accounts for 20 to 25 percent of global GDP, depending on the deflators and the measure you use. But it accounts for fully half of cross-border payments through SWIFT and other channels, for, uh, 57 percent of global foreign exchange reserves worldwide. It’s involved in 90 percent of all foreign exchange transactions worldwide. So the dollar punches above its weight, if you will.

A remarkable state of affairs. And the length of time in which dollar dominance has been a fact of global life is also striking. So after World War II, the U.S. economy was the only market economy standing, and the Bretton Woods system singled out the dollar along with gold as kind of the reference point for other currencies. But then Richard Nixon in 1971 broke the link between the dollar and gold.

He closed the gold window, which offered to provide foreign central banks and governments gold when they redeemed their dollars at a fixed price. And eminent scholars like the MIT economist and economic historian Charles Kindleberger wrote in the 1970s, quote, “The dollar is dead as an international currency.” Nixon had discredited it. He had broken the link to gold.

How wrong can an economic historian be? So that’s caution when you put pen to paper.

Why did the dollar remain as dominant as it did subsequently? Partly the absence of alternatives. The Japanese and German governments, the issuers of the potential rivals to the dollar, actively resisted internationalization of their currencies. Japan thought that widespread access to the yen would interfere with its industrial policy.

Germany, West Germany feared that it would lead to capital inflows into the Deutsche Mark that would be inflationary, And what’s more frightening to a German than inflation? U.S. economic policy, after some hiccups in the 1970s, turned out not to be that bad.

We had a Treasury Secretary, Michael Blumenthal, who actively sought to talk down the dollar. Carter replaced him. We had high inflation.

Paul Volcker was appointed by that same president, Jimmy Carter, to head the Fed, and he broke the back of inflation. So subsequently, U.S. economic policy wasn’t that bad. There was the absence of alternatives. And there was trust in the institutions of governance in the United States and, broadly speaking, in the stability of U.S. foreign and economic policies.

So at home, we had rule of law, separation of powers, control of corruption. You can guess where I’m going. And internationally, we had strong relations with our alliance partners.

So if you look at history, you see that governments and central banks tend to hold and use the currencies of their alliance partners because their alliance partners are seen as trustworthy. There’s that word again, stewards of their reserves. And holding, in this case, dollars was a show of good faith by our alliance partners.

So if you go back to the late 1960s, the period when there was pressure on this fixed link between the dollar and gold, who supported the dollar through what was known then as the Gold Pool? The answer was the governments and central banks of West Germany and Japan. because we had to use modern terminology, boots on the ground in both countries.

We provided the nuclear umbrella for both countries. So again, you can see where I’m going with these remarks. Yesterday, when I was in South Korea, I heard worries there about the reliability of the United States as a trustworthy alliance partner. And if you look at the balance sheet that the central bank, the Bank of Korea publishes at the end of each year, you will see two things.

Number one, historically, South Korea holds a larger fraction of its reserves in dollars than its economic and financial links with the United States and the typical behavior of central banks around the world would lead you to predict. It’s that extra geopolitical link that has historically led to that behavior. And number two, you will see that recently the Bank of Korea has begun to diversify, hedging its bets by moving into what are called non-traditional reserve currencies to hold the currencies of other small, open, well-managed inflation-targeting countries that provide it with a hedge against dollar risk or U.S. risk or Crump risk, whatever you care to call it. So what does this imply for the future?

I do think that we’re moving away from dollar dominance. That earlier book that Brian referred to, Exorbitant Privilege, was published in 2011, and I forecast movement toward a more multipolar, less dollar-centric global monetary and financial system. I sometimes say I’ll keep predicting it until I’m right.

I do think we’re moving away from dollar dominance, but it’s hard to know exactly, you know, how quickly. That depends on what Mr. Trump decides to do when he wakes up tomorrow morning and many other imponderables that we can’t forecast with confidence.

Some people point to the fact that dollar dominance has been eroding very slowly, if at all. The analogy I sometimes use is of an iceberg that melts very slowly, but big chunks can calve off in response to events, or I refer to Ernest Hemingway in The Sun Also Rises, “There are two ways of going bankrupt: slowly and quickly.”

Over to you.

[CHENZI XU]

Yeah. Okay. Many of the things I want to say are going to echo what Barry has already said. But when I was putting these together, my thoughts for today, I thought that maybe I’d start by presenting some facts that some of you may be familiar with, some might not be. And then I’d transition into how I view the system and how what’s holding it together before, you know, giving some final thoughts on maybe where, we are going based on what, where we’ve been in the past.

Okay. So as Barry said, dollar hegemony takes many, many dimensions, and we see this in the ways in which it’s used far beyond the size of the U.S. economy in the world. So in official reserves as a store of values for different countries, about 60% of central bank reserves are held in the dollar relative to the next closest alternative, which is the euro, only at 20%. In trade invoicing, we see it being used to denominate goods even when they’re not being traded with the U.S.

In international debt, it’s a currency of denomination for bonds and credit for the private sector as well as for governments. It’s held in banks around the world, so non-US banks are holding over $21 trillion dollars of dollar liabilities. This was in 2023. That’s about the value of all world trade.

Right. And as Barry mentioned, it’s about 90%, it takes one side of about 90% of the value of FX markets.

And then over time, so depending on good times or bad times, the dollar appreciates in particular when the global economy is in crisis, so when there’s a flight to safety, Okay? So my view of this is that at the base of what makes the dollar special is that it has a large, safe, and liquid asset supply in dollars.

And for the most part, this safe and liquid asset supply is coming from the US government in the form of treasuries, which creates this pool of dollar-denominated debt assets, which then is a platform for other countries, governments, and firms to then base their own denominated assets. And that then feeds into many of the other dimensions that we see the dollar being hegemonic. So in trade invoicing, if you already hold a lot of dollars in your balance sheet, then you might want to hedge that with real goods.

If you have— and if you’re holding dollars, then you also want to hedge local currency risk, and that’s where we’ll see it in FX hedging. And of course then, this is going to be your safe asset when bad times come along, and during a crisis, you need– you have a demand for some assets that will allow you to consume.

Okay. So, you know, this is based on some work that I’ve done, but at the heart of what I think creates this hegemony is this idea that the US is large enough, and it’s also stable enough to support this base of assets. Okay? Now the system, once you’ve created that, is self-reinforcing through a lot of different strategic complementarities.

I’ve drawn some arrows. These are not complete. This is just illustrative. But it’s not just a single causal chain.

It’s once you have hegemony in one dimension, it becomes economically advantageous to continue using the dollar in other dimensions, which then feeds on all of these dimensions that we see. And so, the fact that dollar hegemony is multidimensional is a manifestation of this idea of dominance as opposed to just a related characteristic. And so I think when we talk about alternatives, one of the main reasons it’s hard to think about a real alternative to this system is because a large number of institutions, private and public, are upholding these many network effects.

And so a currency that looks like the dollar but is not the dollar would have to probably, in many ways, mimic all of this infrastructure. That being said, at the heart of this infrastructure, I would say, is on the left, these institutional foundations that allow us to have this large and safe liquid pool.

So we have the legal and regulatory infrastructure, the rule of law, contract enforcement, monetary and fiscal stability is incredibly important. Barry alluded to that as well.

Our economic policy in the ’70s and ’80s greatly stabilized the dollar value over time. Openness and convertibility, that’s very different from, for instance, China and their RMB. And all of this combines to have a currency where we have a lot of credibility in repaying debts, In, uh, that the safe dollar debts.

Okay. With all that institutional foundation in place, we then can bootstrap ourselves through these different coordination foundations. And so, of course, on the left, you can see how many of these elements are a reflection of, or a consequence of domestic policies and domestic decisions, and this is where what the US unilaterally does can impact this foundation. Part of the reason I think we’re not seeing such a rapid decline of the, or as rapid of a decline of the usage of the dollar relative to the, perhaps the changes on the left-hand side, is because we have these coordination foundations, these network effects that are helping to sustain the usage of the dollar, even as perhaps the foundations are being eroded away.

Here I’m not talking about some of the things that have come up recently: the use of sanctions, perhaps the overuse of them, digital payment rails, the emergence of regional blocs, but I think that would be really interesting to discuss with everyone else. But I’m just going to end on thinking about outside the dollar system, what we’ve learned from the past. And so there’s a couple of other historical examples of dominant currencies in the international monetary system. We had the Dutch guilders in the seventeenth, eighteenth centuries.

We had the British pound sterling before the dollar world. And I would say that, they share many patterns, which is that this dominance combined institutional credibility with some form of market centrality. Both the Dutch and the British created market centrality in many ways through different financial innovations.

But then the transitions out of these currencies follow also a very similar pattern: war, fiscal strain, and the loss of monetary credibility. And so, you know, this is where we might see quite a few patterns across these three different eras. Okay, so this is super speculative, but the system with these network effects is naturally very persistent, and so any move outside of the dollar would also likely to be persistent. That being said, it seems like we have yet to find a comparable safe asset liquid ecosystem, and that is helping to keep the dollar where it currently is.

Okay. Thank you very much.

[ROHAN KEKRE]

Okay. Well, thanks so much first to Marion and the whole Matrix team, everyone at Clausen. I recently moved here to Berkeley. It’s a pleasure to be part of this community and to be at events like this.

So I wanted to share my thoughts on this in a way that I think will naturally build on my co-panelists. I wanted to focus on two specific questions, and I’m happy to engage on others in the Q&A.

So the first is whether the demand for dollar assets has in fact eroded over the past year post-Liberation Day, about one year ago in April. And the second, what might be the consequences of a shift in demand for dollar assets? And I’ll share my thoughts on this from the perspective of various papers I’ve written over the last few years on dollar liquidity, on the important roles that the Fed plays in the global financial system and most recently, drivers of the dollar exchange rate.

So let me start with sort of echoing points that were made by Barry and Chenzi, namely that the U.S. dollar serves as the world’s reserve currency because it fulfills sort of the three essential functions of money for the world. Those functions are: it serves as a store of value, a medium of exchange, and a unit of account. That’s what money does in any economy, but the U.S. dollar sort of serves those three functions for everybody.

And you heard many of those statistics from Barry and Chenzi regarding its dominance in each of those three domains. I’d like to focus on its role as a store of value in my remarks, because I think it has some important implications.

First, it implies if there’s a global demand for dollar assets, that’s going to kind of bid up the price of holding dollar assets, and that’s going to mean that for those that want to borrow in dollars, they’re going to have to pay low interest rates. So who is conferred that advantage? Well, natural issuers of dollar liabilities like the US government, hence the term exorbitant privilege that has been mentioned, but also US firms and US households. And so much of the discussion around, for instance, global imbalances or persistent trade deficits in the US have focused on a global demand for dollar assets that bids down borrowing costs for Americans and allows them to fund that consumption.

The second consequence of low interest rates is that, well, everybody, even outside the U.S., if they can borrow in dollars, they will, because it’s cheap to do so. And that’s going to imply that dollar funding is an important part of balance sheets for leveraged investors, think hedge funds or other risk-taking parts of the economy globally. But that means then that U.S. monetary policy, which is really about changing dollar interest rates, propagates internationally in important ways.

If you have a bunch of leveraged investors that have borrowed in dollars and you change the interest rate on dollar borrowing, that’s going to naturally affect their ability to lever up or down, and it’s going to propagate internationally. Or if you have a bunch of leveraged investors that then go into a crisis like COVID or the global financial crisis, and they can no longer borrow in dollars because those funding markets have dried up, that creates a special role for the US Federal Reserve as the lender of last resort in dollar markets to provide that dollar liquidity, hence the notion of dollar swap lines that you might have heard about and that were previously mentioned. Okay. So one signature of the demand for dollar assets is particularly what we see happen in crises, which Chenzi alluded to.

Namely, in crises, as you can imagine, global investors really want to hold dollar assets. It’s a safe store of value. But as they do that, what will happen is the dollar will strengthen in foreign exchange markets ’cause they’re buying up more dollars, but also it’ll drive down U.S. interest rates, dollar interest rates broadly, because you’re buying up all these assets, so you’re willing to hold them even at a lower interest rate, at a lower rate of return.

So this co-movement between interest rates and exchange rates is a signature of a safe haven currency. And what is striking then about what happened last year, post-Liberation Day, is that we saw the exact opposite pattern. So what you see in these graphs, on the left graph is the 10-year yield, that is the 10-year interest rate on the U.S. minus the average of the G10 countries.

The G10 are 10 of the most liquid advanced economies in the world. Think of the Euro area, think of Switzerland, Japan, the UK. And so on the left graph, what you see is that post-April 2nd, US yields, US interest rates rose relative to interest rates in other countries.

At the same time, on the right graph, you see the number of foreign units of currency one dollar could buy you, that fell. That is, the dollar depreciated in foreign exchange markets. And so in other words, what we saw happen last April was the exact opposite dynamics as we typically see for a safe haven country, safe haven currency, excuse me, like the US dollar. Now, this is a quite clean event study in the language of modern econometrics.

But you might ask, did these differences quickly go back? Was this a persistent thing? And the striking thing is that they were.

So this is now zooming out, showing you the same picture. Uh, the dark blue line is, again, US interest rates minus G10 interest rates, and I’m multiplying it by 10, so I can show it on the same graph as the exchange rate. Exchange rates being a price tend to move by more than interest rates, which are a rate.

Um, the light blue line is again the strength of the dollar. And so what you see is that post-April, uh, US interest rates rose relative to those abroad.

At the same time, the dollar depreciated, and that gap did not close by the end of the year. Okay, so the view that I have on this, informed by recent work that I’ve done with Moritz Lenel, a colleague at Princeton, and that we’ll be putting out in a new working paper within the next two weeks, but here’s the sneak peek, is that plausibly a decline in foreign demand for US dollar assets can rationalize this data.

Okay, so what I’m– so from an economic point of view, what are the key ingredients that govern by how much foreigners would need to be selling dollar-denominated assets to rationalize the pictures I just showed you? Well, if foreigners are dumping dollar assets, someone has to buy them.

So the question is, by how much do prices have to move to incentivize the other side to buy them? And this is known as the price elasticity of supply. If you have a demand shift, then how much prices move depends on how elastic the supply curve is. So how might you estimate that elasticity?

The perspective we take is, well, there’s all sorts of other examples we have in financial markets of portfolio flows by one investor that have to be absorbed by another investor. Probably the most widely studied example of such flows are quantitative easing announcements.

When the U.S. Federal Reserve says, “We’re going to buy up a bunch of U.S. assets,” that moves prices. Well, then I can figure out if, given how much the U.S.

Fed bought and how much that moved prices, how much do I need foreigners to be selling dollar assets in April to explain how much prices moved? That’s the basic idea.

And the answer is about five percent of US GDP. Now, that’s a point estimate. There’s a range. And the range is about two to ten percent worth of US GDP.

You can rationalize the data. And what governs the sensitivity? It’s basically how persistent you think foreigners are selling dollar assets. If foreigners are simply exiting the dollar market and not going to hold those assets, you only need a little bit of flow to generate big movements in prices.

But if foreigners are only temporarily selling and then are going to come back, then you need a bigger, bigger movement in quantities to generate the same prices. Now, is this plausible? Sort of. I’m not going to give you all the details of the macroeconomic model that allows us to explain this data, but is this plausible?

I think it is. So a two to ten percent decline in foreign demand for a GDP, Let’s put that in perspective. The foreign-owned Treasury portfolio in the United States is twenty-five percent of US GDP. Foreign-owned debt of US residents is about fifty percent of US GDP.

And foreign-owned assets in the US, that includes equities, is about two hundred percent of US GDP. So if you told me that foreigners are shifting out of dollar assets by an order of magnitude of five, ten percent, that strikes me as very plausible, and the point is that that can have big effects on prices that we just saw. Now, the other thing that it’s worth pointing out, and this is where I think economic theory is helpful, is much of the discussion in policy circles regarding what happened in April was, let’s go look at portfolio data that the U.S.

Treasury puts out or that we can get from the private sector and see, like, who’s selling dollar assets. But one of the insights of modern intertemporal macroeconomics and finance is that asset prices are forward-looking. And so through the lens of the framework that we use to study this, one of the things that becomes clear is that you don’t need anybody to be selling dollars right away.

Even if I have expectations that over the next ten years, to Barry’s point about kind of slow-moving trends, if I believe that going forward, there will be a slow rotation out of dollar assets, well, prices are forward-looking, and they’re gonna impound that information today. Now, what are the consequences then? If you’re at least somewhat persuaded that lower demand for dollar assets is sort of upon us, what might the consequences be?

So to go back to where I started, one consequence is higher interest rates for dollar borrowers. If there’s less demand to hold dollar-denominated assets, then it’s going to be more costly for those people that want to borrow in dollars from the rest of the world. How big might this be?

Let me just give you a back-of-the-envelope. I showed you that long-term interest rates in the dollar relative to foreign interest rates went up by about 0.15 percentage points, so 15 basis points. How big is the foreign-owned portfolio in the US? Let’s be conservative.

Let’s, let’s do all of the foreign-owned assets in the US. That’s about two times GDP.

So one way to think about the consequences of this is that if the stock of borrowing from foreigners didn’t change, but you were just paying more, about 15 basis points every year on that borrowing, you’re going to be paying in perpetuity about 0.3 percentage points of GDP every year. To put that in dollar terms per capita, that’s about three hundred dollars per capita. So it’s as if there was an increase in the taxes on all Americans by about three hundred dollars per person just because there’s less demand to finance these dollar-denominated liabilities.

So that’s one consequence. Now, I was discussing this with my co-author yesterday when I was preparing these slides. Is that big or small? I don’t know.

It is what it is. But one of the interesting things is that even if the dollar cost is, in principle, You perceive it to be not terribly large.

A small movement in the relative cost of borrowing in dollars versus other currencies might engender big movements in portfolios. If you’re a hedge fund and you’re trying to borrow, lever up a trade, why pay fifteen higher basis points to borrow in dollars? Why not just borrow in another currency? And so that margin may be substantially more elastic.

And so that’s the dimension that we have focused on in our work. And an implication of this is that US monetary policy may be far weaker in its effects on the rest of the world than it has been in the past few decades.

In particular, if leveraged investors rely less on dollar funding than, for instance, when the Fed tightens and they raise interest rates, those investors are going to experience smaller spillovers. The U.S.

Fed will be less powerful in affecting global economic conditions. Or the other tools that the Fed has used, like swap lines to provide dollar liquidity, may be actually less of an important part of the toolkit if there’s less dollar funding going around.

So with that, let me conclude. The questions that I wanted to share some perspectives on were: has the demand for dollar assets eroded post-Liberation Day, and who cares? And the perspective that I hope I got across is that asset prices, which are a useful form of information about what investors are expecting going forward, asset prices indeed suggest there will be a rotation out of dollar assets. And why does this matter?

It’s going to imply consequences for borrowing in dollars, and it’s going to perhaps mean that the US policy institutions are less effective than they have been in the past. Thanks a lot.

(applause)

[BRIAN JUDGE]

Great. Thank you all so much for those wonderfully stimulating and rich comments.

So to get us started, there’s a million different directions that we could go. But I think I want to go back to Barry quoting Hemingway, that the two ways of going bankrupt are, or slowly or suddenly.

And I think it might be helpful to kind of disentangle what we might call structural reasons for the dollar being in this position of transition versus what we might call somewhat euphemistically the more idiosyncratic reasons over the last 15 months or so. So I was wondering how you sort of think about disentangling those two kind of longer-term historical processes and these shorter-term sort of specific actions that we’ve seen out of the current administration vis-à-vis this question of dollar hegemony and its future.

[BARRY EICHENGREEN]

I’m not sure we can disentangle, but we can see that the two sets of factors are superimposed upon one another. So there had been ongoing discussion for years about debt sustainability in the United States. The fact that the debt in the hands of the public has now, um, breached the threshold of 100% of GDP, and it’s rising by about 6% of GDP every year, that the United States has a highly polarized political system, which makes it hard to, agree on a compromise that can be sustained over time to move, narrow the budget deficit and begin to stabilize the debt ratio.

Those are long-term financial and political, reflect long-term financial structure, political structure, and so forth. But Liberation Day and threats that we might withdraw from NATO are, I guess, fall into the more idiosyncratic category, and it’s, it’s clear that both are at work simultaneously.

I want to make two other remarks in response to my fellow panelists’ presentations. One is that if you came not for the food but for violent disagreement among the panelists, it’s not there. We can refer now to the Berkeley School of View of the dollar. Number two, I think I would nuance your presentation a little bit about whether the United States, the dollar and Treasury securities continue to enjoy a convenience yield over time, the idea that the Treasury can borrow at lower interest rates than can foreign treasuries whose currencies don’t play the same global funding role.

And the studies seem to suggest that any convenience yield on U.S. Treasuries has eroded over time. I would distinguish that from a second issue, which is the dollar’s safe-haven status.

The fact that not that interest rates are converging to foreign interest rates over time, but whether or not they jump when there’s a spike in global volatility. So historically, that has been the case when a bad thing happened in 2008, even though we caused the bad thing by letting Lehman Brothers fail chaotically.

The dollar strengthened, funds flowed into U.S. financial markets, which reduced the risk of a meltdown. That didn’t happen after Liberation Day. But the question is, what has happened subsequently?

So my impression is that the correlation between various measures of global volatility and the dollar exchange rate did begin to reassert itself toward the end of last year. On the first two trading days after the attack on Iran, the dollar strengthened by one and a half percentage points. So that kind of looks like safe haven behavior.

And it weakened a lot today after the so-called truce was announced. So maybe the safe haven character of the dollar has been dented and it should’ve strengthened by more than one and a half percentage points on March the 2nd and 3rd, or, or weakened even more than it did today.

But whether that safe haven character has been durably affected or not, I’m uncertain.

[CHENZI XU]

So I guess, you know, Rudy Dornbusch, I think, said something kind of similar to the Hemingway quote once about how the crisis always takes longer to arrive than you think it will, but once it arrives, it happens way faster than you think it will. So, you know, to echo Barry, it does seem like there’s a combination of the slow-moving forces as well as then when things unravel, you know, you can’t really disentangle the two. If I… this question, I think I understood it to mean: can we think of there being a fundamental, like, pillar that upholds the dollar status?

And if I were to say there is one, it would be what I presented, which is this idea of a large pool of safe government debt. Now, of course, underneath all that is these institutional arrangements and credibility. And what Rohan presented was incredibly enlightening because it shows that, you know, the response to these announcements about trade was not a response in trade, right? It was not a dollar appreciation, as you would expect, and in fact suggest that it has to be a shock to how people view the dollar and how much they want to hold it.

At some point, the idiosyncratic becomes systemic. But I do think we have, like, we do have, hopefully, years of policy space to work with.

[ROHAN KEKRE]

So let me make a few points on this. So first, to echo something that Barry said, it’s actually an interesting distinction and one that I didn’t draw on in my remarks. But there is a distinction between the extent to which the dollar is special and the extent to which U.S.

Treasuries are special, and we often conflate them, and even in my presentation, I was being a bit loose. But those are distinct objects. How might\u2014 How might you measure the sense in which treasuries are special? Well, one way that the literature has done this in finance and economics has said, let’s ask how much it costs other governments to borrow in their own currency, But let’s forget about the exchange rate part of it by using the forward market to turn it into an effective dollar instrument.

And then let’s ask how much cheaper is it for the US Treasury to borrow relative to, let’s say, the German government or the Japanese government? And this is known as the Treasury basis, where it’s a measure of the Treasury convenience yield. Historically, it has been the case that the US Treasury could borrow more cheaply than a hedged borrowing from Japan or Germany. Okay.

But as Barry mentions rightly, over time, this appears to have been eroded. And maybe it has to do with the fact that the US government is borrowing a lot more. Maybe it has to do with plumbing and financial markets, but that has changed.

There is a separate matter. There’s a separate matter, which is how much cheaper is it to borrow in dollars for anybody to just issue a dollar security?

That is a benefit that would accrue even to US firms or US households. Measuring that convenience yield, which is related to what I was talking about, that’s a lot harder. That’s a lot harder because it’s hard to figure out what is compensation for risk and what is something else.

That’s basically the basic idea. And so I don’t think we have credible estimates of what that dollar premium is.

I think what we can do, though, is look at event studies like the one I showed you that suggests that, related to Chenzi’s point, neoclassical theory would suggest when the US imposes tariffs on foreigners, the dollar should have appreciated. The fact that it didn’t and it behaved this way with interest rates looks like an erosion of the dollar convenience yield.

But how much that steady state premium is, it’s really hard to measure. And so that’s why I did everything in changes.

On the second point about co-movements, I fully agree actually with Barry on this. I think, you know, I was being a bit deliberately provocative by showing you this Liberation Day picture ’cause it is striking. But I quite agree that if you look at daily co-movements of the dollar exchange with other variables, it’s not clear that there’s been a regime shift post-April. That doesn’t mean that there hasn’t been a level shift in the demand for dollar assets, and I think that’s where the event study type stuff is helpful.

One thing I’ll mention regarding the recent Iran events is that the co-movements of the dollar around Iran news. I think it’s hard. We have to be aware of the fact that a lot of this is about movements in oil prices and energy prices, and the US is now a net exporter. And so, of course, it’s going to benefit when oil prices go up, and the dollar will depreciate when oil prices go down.

So anyway, let me make those two points. On the broader point about how do you disentangle secular trends from, um, from the citizen Socratic stuff, right? This is super hard. I don’t have anything new to add there except to say that, I think that’s why these event studies are instructive.

[BRIAN JUDGE]

Great. So I just wanna pick up on a point, that Chenzi mentioned about alluding to years of policy space. So in that vein, later this month, we’ll have hearings for a new Federal Reserve chair.

So to the extent that the dollar has a single steward, I point to the Federal Reserve chair as being that individual. And so what do you see as sort of some of the challenges facing the new Federal Reserve chair in this environment?

[CHENZI XU]

Okay. So, um, I was being optimistic. I hope that that’s the case. I mean, I do think that one thing that has that, you know, recent events the last few years in financial markets have shown us is that many of the stickiness that we sort of come to rely on in financial portfolios is less sticky now than it used to be, and that’s probably because of a lot of digital innovations and whatnot.

So, you know, bank runs today are much faster than they used to be. And so, you know, my thought that we hopefully have time, it rests on sort of this understanding of, you know, it takes time for people to find alternatives, but it is also a little bit perhaps optimistic. I mean, the main thing that, you know, Volcker did, which clearly put the Fed on a different trajectory, was being very clear about establishing its independence.

And I don’t know Kevin Warsh well. His policy writings have, his public writing has suggested that he would like for the Fed to continue to be in— um, to have more independent thought. That was always in the context of this idea that within the Fed, policy researchers have over time converged into one way of thinking about what the right policy is.

And so, you know, his writing on this area was about encouraging independence. Now, I don’t know if that translates into independence from the president, of course, but that I think is, of course, what’s top foremost in what people are thinking about.

[BARRY EICHENGREEN]

A negative supply shock, which is what we are experiencing at the moment, is the central banker’s worst nightmare because it leads to inflation, which creates pressure to raise interest rates, and it leads to recession, which creates pressure to lower interest rates. Every, energy price shock in twentieth century history was followed by a recession, and we’re about to get a test of the hypothesis that energy shocks matter less now because the US is an energy exporter, and who cares that our energy markets are linked to those in the rest of the world? We will see. The next Fed chair will face pressure from the markets to raise interest rates and pressure from the president to lower interest rates.

Good luck with that. And finally, what Chenzi said about the independence of the central bank is really important, that it’s part of that separation of powers and respect for institutions that are the fundamental foundation of confidence in the dollar domestically and globally.

[ROHAN KEKRE]

I think my panelists covered that one. I have nothing more to add.

[BRIAN JUDGE]

So I guess, Barry, your new book ended in a place that I didn’t expect. And so I want to ask you a little bit about that.

You end by alluding to the crisis of the 1930s, where we see a global liquidation in dollar reserves. So what about sort of the 1930s?

The experience of the 1930s provides a useful analog to thinking through sort of the worst case or a bad case scenario for the dollar moving forward over the foreseeable future?

[BARRY EICHENGREEN]

One argument about dollar dominance is TINA. There is no alternative, and the dollar will remain dominant because there is no other currency that provides that supply of safe and liquid assets that the global economy requires. I don’t think that’s a compelling argument for indefinite dollar dominance.

There can still be a crisis of confidence that leads to flight away from borrowing in dollars and holding dollars and using dollars in payment. And if there is no alternative, that means that accessing the credit requiring to make cross-border payments in conjunction with trade or investment or whatever will become more costly and more difficult. And that’s part of my understanding of what happened in the 1930s when we had three banking crises in the U.S. Confidence in dollar reserves abroad was lost.

Dollar reserves were liquidated, and that’s not the explanation for why, um, the first age of globalization ended in the 1930s, but I think it’s part of the explanation.

[BRIAN JUDGE]

Great. So I have a question for Rohan. So in your talk you mentioned sort of dollar funding for leveraged investors, and a kind of leveraged investor that’s been getting a decent amount of attention in the financial press has been the Treasury basis trade. So I was wondering if you, for all of our benefit, if you can sort of explain kind of what the basis trade is and why it’s beginning to attract some attention from regulators and how it relates to sort of funding the yawning US public deficits.

[ROHAN KEKRE]

Sure. So the Treasury basis trade is a trade that investors will often do to trade in cash Treasuries, meaning holding an actual Treasury bond and trading in futures markets linked to Treasuries, which take up much less space on your balance sheet because there’s a big notional amount, but you’re not actually holding that security on your balance sheet. And for various reasons, other market participants would rather hold those futures and get leverage from that as opposed to holding cash treasuries. And so there’s a price differential, even though these ultimately pay the same amount of money. And so a hedge fund that takes the other side is basically be able to earn the spread with taking effectively no risk because these are two identical securities.

So this is a failure of no arbitrage in a sense. Now the way that they make money off this is by leveraging this trade up. You’re borrowing in one security, holding the other, and so the amount of leverage involved can be quite substantial.

The issue, of course, is that if those leveraged investors take balance sheet losses, they need to close out those positions. That can widen the mispricing in markets, and this is a market that is very sensitive. Of course, if you start screwing around with the yield on treasuries, this matters a lot for the Treasury Department and for public policy.

So that’s basically what the Treasury basis trade is. Now, this is a trade that is not just being done by U.S.-based investors.

This is also being done by global hedge funds and recently the Bank for International Settlements, which is kind of like the central banks, the central bank for all the central banks. It’s not a lender of last resort, but it convenes many of the central banks and provides advice on global financial stability. The BIS recently has been Uh, the putting pressure on other central banks to get a control, get control over the extent to which this basis trade, these, this activity is happening.

I would say that the basis trade is an illustration of how leverage can create havoc in financial markets. It’s a bit distinct from the kind of dynamics that I was talking about here, because it’s both—it’s dollar neutral. You know, you’re short and long, both in dollars. But I think it’s just a manifestation of how the plumbing of financial markets can really matter for financial markets and then for the broader economy.

[BRIAN JUDGE]

Great, thanks. And I guess so, my my last question before we turn it over to the audience would be, I guess, another way of framing the continuing kind of hegemony of the US dollar is the kind of lack of alternatives from the standpoint of a global reserve asset. And so the two that people often point to, on the one hand, you have the Chinese renminbi, on the other hand you have the euro. And for very different reasons, it seems that neither is sort of in a position to kind of simply displace the dollar.

I don’t know, Barry has done some recent work and talks about this in the book. We’ve seen a move towards these sort of smaller, open, well-managed currencies rather than simply kind of a move towards the renminbi as I think some commentators, somewhat simplistically identify. And so what is it about both in the Chinese case and then in the European case that sort of limits the ability of these currencies to displace the dollar as a global reserve asset?

[BARRY EICHENGREEN]

I can, I can start. In euro, it is a shortage of Chenzi’s safe and liquid assets, so only three euro area governments have AAA ratings from all the rating agencies: Germany, Netherlands, and Luxembourg.

So the market in those securities is not as liquid and therefore not as regarded as safe as and, and lacks the scale more broadly of the market in U.S. Treasuries, which is the single largest security market in the world.

That’s a problem that could be solved by financial engineering. The securities of other countries could be sliced and diced, so some were senior relative to others and got first call on being serviced by the revenues of the Italian or the Greek government. But financial engineering is different from political engineering, that the Treaty of the European Union would have to be amended, in order, I think, in order to make that possible, and that’s easier said than done. In the Chinese case, China starts out way behind the United States.

It accounts for like two percent of global foreign exchange reserves, not fifty-seven percent. Its financial markets are still not fully open to the rest of the world.

And you can make the same arguments about separation of powers and rule of law that I made earlier for the United States about China. So when I go to China and I talk about this, I say every leading international and reserve currency in history has been the currency of a political democracy or republic with a separation of powers.

And my Chinese audience listens respectfully but doesn’t respond.

(laughter)

[CHENZI XU]

Um, yeah, I guess just to add to that, you know, we’ve kinda circled around it a couple of times, but the alternative may not be another hegemonic player. It may be regional blocs. And there’s a sense in which maybe China would be very happy to be a leader within an East Asian bloc or Asian bloc. And maybe the euro already plays that role within Europe.

So it’s just another, you know, part of this trend of sort of global retrenchment.

[ROHAN KEKRE]

Yeah. I mean, I teach Barry’s stuff in my class, so I’m just going to echo him. But the way I think about it is fragmentation in the Euro area bond markets, undercuts their role as a safe asset. And in China’s case, of course, capital controls makes it a not a very attractive place to um, uh, park your money.

I just want to mention on this note something, sort of a neat insight, I think, from recent theoretical work on this. Not my own work, but some of our colleagues in other places. One of the interesting things I find about this issue of liquidity is we tend to think that if governments issue more debt, that’s a bad thing because it’s kind of more of a risk that they’re going to default or they’re going to inflate away the value of the debt.

But one of the things that the recent academic literature on this topic has made clear is that there’s a bit of a Goldilocks zone, because if you issue too little debt, then that market is not liquid enough. And part of the benefits that Chenzi is alluding to is that in US dollar markets, there’s so much treasury debt out there that you know that if you ever needed to sell it in a pinch and get cash, there would be a buyer. And so there is actually a cost to not issuing too much, to not issuing enough debt or for debt to be too heterogeneous. And I think that’s part of the issue in the euro area is that you have bond markets from Germany and from France and from Italy, and these are not the same paper, and so it’s not quite clear that, they’re as liquid as U.S.

Treasury markets. Of course, there’s a cost perhaps to issuing too much, but it’s one of these insights from recent work that I think is kind of important to keep in mind.

[BRIAN JUDGE]

Great. Well, thank you all so much. So please join me in giving a round of applause for our wonderful panelists.

(applause)

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