RCIF | Research Center for International Finance
Policy discussion No. 2015.002
Dec.30  2015

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Local Currency Trade Settlement under the International Monetary System with the US Dollar as a Key Currency

Eiji Ogawa

1. Introduction

The global financial crisis affected financial institutions in not only the United States but also Europe even though it occurred by nonperforming subprime mortgages and subprime mortgage backed securities in the United States. It damaged balance sheets of European financial institutions. The damaged balance sheets of European financial institutions increased counterparty risks in interbank markets in Europe. They faced US dollar liquidity shortage in Europe. The euro and the sterling pound depreciated so much against the US dollar. Figures 1a and 1b show that the depreciation of the euro and the sterling pound during the global financial crisis was larger than that in the euro zone crisis after 2010.
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2. Lessons from European Experience during the Global Financial Crisis
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3. Inertia of the US dollar as a key currency under the current international monetary system
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4. Conditions for local trade settlement currency
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5. Conclusion
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