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.
https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_05
