by Nil
In January 2026, the Bank for International Settlements published a dense but far-reaching study that cuts to the core of the modern international financial system. Titled Dollarisation waves: new evidence from a comprehensive international bond database, BIS Paper No. 165 examines how global debt issuance has evolved over the past three decades and why, despite repeated predictions of its decline, the US dollar continues to entrench itself at the centre of international finance. Written by Swapan-Kumar Pradhan, Eswar Prasad, Előd Takáts and Judit Temesvary of the BIS Monetary and Economic Department, the paper draws on one of the most detailed bond databases ever assembled by the institution, covering sovereigns, banks and non-financial corporations across advanced and emerging economies.
The authors make clear from the outset that dollarisation is not a static condition but a cyclical phenomenon. “International debt markets experience recurring waves of dollarisation,” they write, adding that these waves are “closely linked to global financial conditions, especially the stance of US monetary policy and investors’ appetite for risk.” The paper challenges the notion that currency choice in debt issuance simply reflects trade invoicing patterns or long-term structural preferences. Instead, it presents dollarisation as a strategic response by borrowers and lenders to shifts in global liquidity, interest rate differentials and perceived safe-haven status.
The BIS study comes at a moment when policymakers in Europe, China and parts of the Global South have renewed calls for “de-dollarisation.” Sanctions regimes, weaponisation of payment systems and geopolitical fragmentation have all been cited as reasons to expect a gradual erosion of the dollar’s role. Yet the data assembled by Pradhan, Prasad, Takáts and Temesvary point in the opposite direction. “Despite episodic retrenchments, the US dollar remains the dominant currency of international bond issuance,” they conclude, noting that its share has rebounded sharply in the years following global shocks.
One of the paper’s central contributions is its disaggregation of dollarisation across borrower types. Sovereigns, banks and non-financial corporations behave very differently when choosing the currency of issuance. The authors show that emerging market sovereigns often increase dollar issuance after crises, even when domestic policymakers publicly emphasise local-currency financing. “For sovereigns, access to deep and liquid dollar markets can outweigh concerns about currency mismatch,” the paper observes. This pattern was evident after the global financial crisis of 2008 and again following the pandemic-era shock of 2020.
Banks, by contrast, display what the authors call “procyclical dollarisation.” When global financial conditions are easy and dollar funding is cheap, banks expand their dollar-denominated liabilities rapidly. When conditions tighten, they retrench abruptly. The BIS paper links this behaviour to the global banking system’s reliance on short-term wholesale dollar funding, a vulnerability that has repeatedly surfaced during periods of stress. “Dollar funding strains propagate quickly across borders,” the authors warn, echoing earlier BIS research on global liquidity cycles.
For non-financial corporations, especially in emerging markets, the story is more complex. Many firms issue dollar debt not because their revenues are dollar-based, but because “investors demand dollar instruments as a hedge against local macroeconomic risk,” as the paper puts it. This creates what the authors describe as a “latent currency mismatch,” one that may remain hidden during periods of stability but becomes destabilising when exchange rates move sharply.
The euro occupies a central but ultimately subordinate place in the BIS analysis. In the early 2000s, the single currency appeared poised to challenge the dollar’s supremacy. Euro-denominated international bond issuance surged, particularly among neighbouring economies and global banks. However, the paper documents a marked reversal after the euro area sovereign debt crisis. “The euro’s role as an international funding currency plateaued and then declined,” the authors note, attributing this to fragmentation within euro area financial markets and lingering doubts about institutional cohesion.
Even in regions where trade ties to the euro area are strong, borrowers have increasingly reverted to the dollar. The BIS authors point out that this is not merely a function of habit, but of market depth. “Liquidity begets liquidity,” they write, arguing that the unparalleled scale of US Treasury and corporate bond markets continues to attract global investors, reinforcing the dollar’s dominance regardless of geopolitical noise.
A particularly revealing section of the paper examines offshore financial centres and their role in amplifying dollarisation. Jurisdictions such as the Cayman Islands, Luxembourg and Singapore act as conduits for international bond issuance, obscuring the ultimate nationality of borrowers. By reconstructing issuance on both a nationality and residence basis, the authors show that a significant share of “offshore” dollar debt ultimately belongs to emerging market entities. “Offshore issuance does not imply offshore risk,” the paper cautions, highlighting how vulnerabilities can migrate invisibly across borders.
This methodological contribution is one of the paper’s most important. By going beyond traditional residence-based statistics, the BIS researchers capture the true extent of currency exposure faced by national economies. In doing so, they reinforce a long-standing BIS concern that official data often underestimate balance-sheet risks. “Nationality-based measures provide a clearer picture of who ultimately bears currency risk,” Pradhan and his co-authors argue.
The dollar’s dominance, far from fading quietly, is being reaffirmed cycle after cycle by the very dynamics that critics hope will undo it.
The paper also revisits the relationship between dollarisation and US monetary policy. Drawing on decades of data, the authors find that tightening cycles by the Federal Reserve tend to coincide with spikes in dollar issuance abroad, as higher US rates attract capital and strengthen the dollar’s appeal as a store of value. This counterintuitive result underscores the structural power of US financial markets. As the paper notes, “Even when dollar funding becomes more expensive, its perceived safety can dominate cost considerations.”
For emerging market policymakers, this creates a dilemma. Efforts to deepen local currency bond markets have achieved partial success, particularly in Asia. Yet the BIS study suggests these markets remain vulnerable to global shocks. “Local currency markets do not insulate economies from global dollar cycles,” the authors write, adding that foreign investors often retreat from local markets precisely when domestic financing is most needed.
The implications extend beyond economics into geopolitics. While the BIS paper is careful to remain technocratic in tone, its findings implicitly challenge the feasibility of rapid de-dollarisation. The authors acknowledge political motivations but emphasise structural constraints. “The international role of a currency rests on trust, liquidity and institutional depth,” they write, a formulation that echoes classic theories of reserve currency dominance. In this framework, alternatives to the dollar face a steep uphill battle.
Eswar Prasad, one of the paper’s authors and a former IMF chief economist, has long argued that the dollar’s dominance is sustained less by US policy virtue than by the absence of credible substitutes. That view is embedded throughout the BIS study. Even as China expands renminbi swap lines and the euro area reforms its fiscal architecture, the bond market evidence suggests that global investors continue to default to the dollar in times of uncertainty.
The BIS is careful to stress that the views expressed in the paper “do not necessarily reflect the views of the BIS or its member central banks,” a standard disclaimer that nonetheless underscores the sensitivity of the topic. Central banks around the world are acutely aware that dollarisation can constrain monetary sovereignty, amplify external shocks and complicate crisis management.
Yet the data leave little room for illusion. Over the period studied, the dollar accounted for the majority of international debt securities issuance, with its share rising during successive global stress episodes. The euro’s share, while significant, remained second-tier, and other currencies played marginal roles. As the authors put it, “The international monetary system remains asymmetrical.”
The paper turns to policy implications. Rather than framing dollarisation as a pathology to be eliminated, the authors suggest managing its risks more realistically. This includes strengthening macroprudential frameworks, monitoring foreign currency exposures on a nationality basis, and ensuring access to international liquidity backstops. The experience of the Federal Reserve’s dollar swap lines during crises is cited as evidence of how central bank cooperation can mitigate systemic stress.
