Template-type: ReDIF-Paper 1.0
Author-Name: Cara Bordier
Author-Name-First: Cara
Author-Name-Last: Bordier
Author-Name: Lukas Frei
Author-Name-First: Lukas
Author-Name-Last: Frei
Author-Person: pfr421
Author-Name: Simon Stalder
Author-Name-First: Simon
Author-Name-Last: Stalder
Author-Person: pst1035
Title: Dollar dominance: A source of dollar volatility?
Abstract: The US dollar (USD) is involved in 88% of global foreign exchange transactions, partly due to its role as a vehicle currency. Using high-frequency data from primary interdealer platforms, we develop a novel methodology to identify USD cross-trades. We show both theoretically and empirically that such trades can generate price fluctuations in USD exchange rates. Employing an instrumental variables approach, we find that increased cross-trading activity amplifies aggregate USD volatility. These results highlight a fundamental trade-off: while dollar dominance enhances market liquidity, it also increases the currency’s exposure to shocks originating in other currency pairs.

Length: 73 pages
Creation-Date: 2026
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_05
File-Format: text/html
Number: 2026-05
Classification-JEL: F31, G12, G14, G15
Keywords: Dollar dominance, Volatility, Foreign exchange markets, High-frequency trading
Handle: RePEc:snb:snbwpa:2026-05