Dollar Dominance in Trade Invoicing: Exchange-Rate Pass-Through, Trade Adjustment, and the Financial Vulnerability of Emerging-Market Exporters

Abstract

The U.S. dollar is used to invoice a share of world trade several times larger than the U.S. share of world trade itself. This article reviews the theoretical and empirical literature on dominant-currency invoicing and examines its consequences for how international trade adjusts to exchange-rate movements and financial shocks. The review contrasts three pricing paradigms, producer currency pricing, local currency pricing, and dominant currency pricing, and shows, with a simple numerical illustration, that they generate sharply different predictions for exchange-rate pass-through and for the expenditure-switching role of exchange rates. It then synthesizes firm-level and macroeconomic evidence indicating that pass-through into import prices is governed primarily by the currency of invoicing rather than by the identity of the trading partners, that dollar appreciation depresses trade volumes globally, and that these trade effects are amplified through a financial channel operating on firms and banks with dollar-denominated liabilities. A stylized simulation illustrates how the trade and financial channels combine in the export response of an emerging-market exporter. The article concludes that dollar dominance reallocates the burden of global adjustment toward emerging economies, weakens the stabilizing role of flexible exchange rates, and creates an interdependence between trade and finance that conventional open-economy models omit. Implications for exchange-rate policy, reserve management, and the design of trade finance are discussed, together with an agenda for future research on the joint determination of invoicing and funding currencies.