Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Dollar Dominates Global Payments in 2026
Transcript
- Lucas: So the trade-weighted dollar index just hit 120.1 as of last week—that's up from 119.36 a week earlier, and it's been climbing pretty steadily since the start of the year. Luna: That's a big number. I know the index was around 115 a year ago. What's driving it now? Lucas: A few things. First, the Fed has kept rates higher for longer than most other major central banks. The yield gap between US Treasuries and, say, German bunds or Japanese government bonds is still wide. That pulls capital into dollar-denominated assets. Luna: Right, the carry trade. Borrow in yen, buy dollars. Lucas: Exactly. And then on the trade side, the dollar's role as the primary invoicing currency just reinforces itself. SWIFT data from May shows the dollar's share of international payments held above 48 percent. The euro is at about 23 percent, the yen around 5 percent, and the yuan—despite all the talk about de-dollarization—is still under 4 percent. Luna: So despite China pushing for yuan-denominated oil contracts and India settling trade in rupees, the numbers barely budge. Lucas: Right. And that gets to the structural story. It's not just about which currency is used for payments. It's about where the deep, liquid capital markets are. If you're a company in Indonesia exporting to Europe, you want to invoice in a currency where you can hedge, where there's a deep derivatives market, where your bank can finance the trade easily. That's the dollar. Luna: And the US bond market is still the deepest in the world by a huge margin. So even if you're a central bank diversifying reserves, you can't really avoid Treasuries. Lucas: Exactly. So when you hear headlines about BRICS creating a new reserve currency or countries settling trade in local currencies, it's worth asking: how much volume are we actually talking about? The Bank for International Settlements did a paper last year showing that bilateral swap lines and local-currency settlement agreements account for less than 2 percent of global trade finance. Luna: That's tiny. And yet the narrative gets a lot of attention. I think people want to believe the dollar's dominance is fading because it feels like a correction to unipolar times. Lucas: Sure, and there are real frictions. The strong dollar is crushing emerging market importers, especially those that invoice in dollars but earn revenues in local currencies. We've talked about that before. But the mechanism of dominance is self-reinforcing. Every time a company chooses the dollar for a trade, it adds another data point to the network effect. Luna: Speaking of network effects, it reminds me of something we discussed a few episodes back about how SpaceX IPO reshaped capital flows. That was about equity, but the same logic applies—the deepest pool attracts the most activity. Lucas: That's a good parallel. And on that note, I want to mention something. If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going. You can support the show at buy me a coffee dot com slash fexingo. No pressure, just if you've gotten something out of them. Luna: Yeah, it really does make a difference. We keep the show ad-free, and listener support is what makes that possible. Lucas: Alright, back to the dollar. So we have this structural dominance, but there are also cyclical pressures right now. The trade-weighted dollar at 120 is a 20-year high. That's creating real stress in places like Turkey, Argentina, and even parts of Southeast Asia. Luna: I saw that emerging market ETFs actually had a good week—EWZ, the Brazil ETF, was up over 4 percent in the last five days. But that might be a bounce from oversold levels. Lucas: Yeah, and it's not uniform. The Korea ETF, EWY, jumped 6.4 percent. But that's more about domestic politics and tech exports. The dollar strength is a headwind for all of them. For multinationals operating in those markets, it means when they repatriate profits, they get fewer dollars. That affects everything from dividend policy to M&A. Luna: And it changes the calculus for cross-border deals. A US company looking to buy a European firm finds that the dollar buys more euros than it did a year ago. So dollar-denominated acquisitions get cheaper. Lucas: Right, and we've seen that. Cross-border M&A involving US buyers hit a record in Q1 this year, partly because of the strong dollar. But for companies in emerging markets, the opposite is true—they can't afford to buy US assets because their currencies have weakened. Luna: So the strong dollar is asymmetric in its effects. It helps some, hurts others. Lucas: Exactly. And that's why central banks outside the US are watching the Fed so closely. If the Fed cuts rates later this year, the dollar might weaken a bit. But the structural factors—the depth of US capital markets, the role of the dollar in trade invoicing—those don't change with a rate cut. Luna: Is there any scenario where the dollar loses its top spot? Over a longer horizon, I mean. Lucas: Economists like Barry Eichengreen have argued that a multipolar reserve currency system is possible over decades. But it would require deep, open capital markets in the eurozone or China, free from capital controls, with strong rule of law. China's bond market is big, but it's not fully open, and the yuan isn't freely convertible. So that's a long way off. Luna: And Europe has the capital markets, but political fragmentation makes it harder. No single government bond that's as safe as Treasuries. Lucas: Right. So for the foreseeable future, the dollar remains the dominant currency in global payments, trade finance, and central bank reserves. The question is how that dominance affects different players. For listeners running multinational operations, it means thinking about currency risk in a sustained strong-dollar environment. Luna: And for anyone trading or investing, the dollar's path is probably the single most important macro variable to watch. Lucas: Absolutely. So keep an eye on the Fed, keep an eye on SWIFT data, and remember that the network effects of currency are hard to break. That's it for today. I'm Lucas. Luna: And I'm Luna. Lucas: We'll be back tomorrow with another episode of International Business with Fexingo.