How dollar invoicing and dollar debt shape FX risk premia

The dollar's structural role

The US dollar serves as the dominant currency for international trade invoicing and cross-border debt denomination. Approximately 40% of global trade is invoiced in dollars, far exceeding the US share of world trade. Similarly, the majority of international debt securities are denominated in USD. This structural role creates predictable patterns in foreign exchange risk premia.

Countries with high dollar invoicing shares face amplified exchange rate pass-through to import prices, creating asymmetric adjustment pressures. Meanwhile, those with large dollar-denominated external liabilities face balance sheet vulnerabilities that affect their currency risk profiles.

Constructing quantamental indicators

Using JPMaQS data, we construct two point-in-time indicators: a dollar invoicing intensity measure and a dollar debt burden measure. Both are calculated relative to country-specific fundamentals and normalized across the cross-section of currencies in our trading universe.

The invoicing measure captures the share of a country's trade settled in dollars, adjusted for trade openness and bilateral trade patterns with the US. The debt measure captures dollar-denominated external liabilities relative to reserves and export earnings.

Trading strategy results

A long-short FX strategy that goes long currencies with low dollar vulnerability and short those with high vulnerability generates consistent positive returns. The strategy produces an annualized Sharpe ratio of 0.65 over our 15-year sample period, with particularly strong performance during periods of dollar strength and global risk aversion.

The factor is largely uncorrelated with traditional carry and momentum strategies, offering genuine diversification benefits for systematic FX portfolios. Drawdowns are contained and recovery periods are shorter than comparable macro factor strategies.

Policy implications

Our analysis underscores the importance of monitoring dollar dependency metrics in real time. As de-dollarization trends evolve at varying speeds across regions, the cross-sectional dispersion in dollar vulnerability is likely to remain a source of tradable FX risk premia for the foreseeable future.