The liquidity of the dollar money market is the source of the dollar’s global dominance as the world’s reserve currency, and financial innovations play a crucial role.
According to new research by Antonio Coppola, Arvind Krishnamurthy, and Chenzi Xu of Stanford Graduate School of Business, the liquidity of the dollar money market is the source of the dollar’s global dominance as the world’s reserve currency. This means that debt issuers can be confident that they can easily obtain dollar-denominated assets from global investors to pay back lenders. Financial innovations such as the securitization of assets, growth of repurchase agreements, and central-bank liquidity swaps are also key to currency dominance. As more firms and governments issue debt in dollars, this further adds to the stock of money-like instruments corporations can use to settle their liabilities. The study also suggests that the Chinese renminbi is unlikely to topple the US dollar until China makes substantial progress in opening its capital markets to foreign investors and nurturing financial innovations.
Source: https://www.gsb.stanford.edu/insights/secret-dollars-success-nope-its-not-trade
