Increasing use of the renminbi outside China by residents of the rest of the world has focused attention on the financial developments that come along with this process. Global use of a currency transforms its money and bond markets, as offshore trading gains weight. When such trading spreads across time zones, so does exchange of the currency against other currencies. How does this diffusion proceed?
When the dollar, Deutsche mark and yen became widely used currencies, no broad surveys of foreign exchange (FX) tracked their diffusion processes. But, in 2013 and 2016, surveys captured trading in the currencies of major emerging market economies (EMEs) in dozens of locations. This study uses these two Triennial Central Bank Surveys of Foreign Exchange and Over-the-Counter (OTC) Derivatives Market Activity to study the geographical diffusion of nascent international currencies.
The study investigates a particular pattern of diffusion. We observe that the geographical distribution of US dollar trading resembles that of the yen, although the two currencies play different roles. We propose that currencies in the process of internationalising converge to the same global distribution. That is, for EME currencies, a lot of trading initially occurs at home and in the nearest big financial centre. Over time, FX trading spreads across the time zones to close the gap between this regional focus and the global distribution. This end-point – an international currency trading everywhere in proportion to other currencies – accords with the key vehicle currency role played by the dollar, particularly in swaps.
We find that the trading of major EME currencies spreads according to this pattern. In particular, the Chinese renminbi, the Mexican peso, the Indian rupee and the Korean won all follow the same pattern. The renminbi shows the fastest diffusion among these. For the renminbi, the Asian centres that had a head start in trading are tending to lose ground to centres in Europe and the Americas.