Maurice Obstfeld opens his recent PIIE note with a crisp proposition: the world does not need America’s current-account deficit to satisfy excess demand for dollars. In the narrow accounting sense, this is a useful corrective. His point is that foreigners can acquire dollar assets not only by exporting goods and services to the United States, but also by selling assets, borrowing, or reallocating portfolios; in those cases, the financial account adjusts without any one-for-one movement in the current account. He also stresses that offshore dollar creation can take place without any transaction crossing the US border.
That argument is persuasive, but its force depends heavily on the structure of the modern international monetary system. Today’s world is not Bretton Woods. It is a world of large gross balance sheets, deep cross-border capital markets, and a very large inherited stock of dollar assets and liabilities already held abroad. The Federal Reserve’s 2025 review shows that the dollar still accounted for 58 percent of disclosed global official reserves in 2024, while the BIS reports that dollar credit outside the United States continued to grow through end-Q3 2025 and stood at about $14 trillion. In such a system, additional demand for dollar claims can often be accommodated through portfolio shifts and offshore balance-sheet expansion rather than through a contemporaneous widening of the US current-account deficit.
This is why the eurodollar mechanism matters so much in the debate. The basic idea is straightforward: dollar-denominated liabilities can be created outside the United States, within offshore banking chains, even when no US resident is involved in the transaction. Obstfeld illustrates the point with a simple example in which dollars deposited in a Dubai bank are redeposited in London and then lent onward, generating multiple offshore dollar deposits without any cross-border US transaction. The BIS paper by Dong He and Robert McCauley makes the same broader point from a more analytical angle: eurodollar banking is largely about intermediation among non-US residents, and the authors explicitly argue that it has had little to do with the direction of net capital flows or the US current-account balance.
Once this is recognized, the strongest version of the old reserve-currency argument becomes hard to sustain. If the world can satisfy some of its demand for dollar claims through offshore banking and gross capital-market transactions, then it is no longer correct to say that the United States must continuously run larger current-account deficits simply because foreigners want more dollar assets. On this point, Obstfeld is right. His historical observation that the Eurodollar market emerged in London during the 1960s, when the United States was still running current-account surpluses, is especially telling because it shows that offshore dollar finance can expand even when the reserve issuer is not supplying net claims through external deficits.
Still, this does not mean that the current account becomes irrelevant. Obstfeld himself concedes that strong international demand for dollars may support a stronger dollar and thereby weaken the US current-account position, even if he is skeptical that this mechanism explains most of the deficit. That qualification is important. The real question is not whether the current account must move mechanically with dollar demand; it is whether a dollar-centered international monetary system can indefinitely relax the external constraint through offshore intermediation and gross capital flows. In today’s financially integrated environment, the answer is often yes at the margin. But the relevant word is “indefinitely.”
The reason is that offshore dollar creation has limits. A eurodollar is ultimately a promise to deliver dollars. That promise can circulate for a long time across private balance sheets, but in periods of stress the system still requires credible access to actual dollar liquidity. This is precisely why Federal Reserve swap lines matter. The Fed states that these arrangements were introduced to address stresses in US dollar funding in overseas markets and to allow foreign central banks to deliver dollar funding to institutions in their jurisdictions during times of market stress. In other words, the offshore dollar system relaxes the need for the United States to supply dollar claims through the current account, but it does not eliminate the ultimate need for dollar liquidity backstops.
This is where the debate becomes more interesting in a world of rising geopolitical tensions. Obstfeld’s argument is strongest in a highly integrated international financial system, one characterized by deep capital mobility, thick offshore dollar markets, and confidence that dollar liquidity can be accessed when needed. But if geoeconomic fragmentation gradually reduces openness, raises payment frictions, or makes access to dollar backstops more conditional, then his argument becomes less general. The point is not that the world is returning to Bretton Woods in any literal sense. It is that a more segmented global system would make offshore dollar creation less elastic and would restore greater importance to hard-currency earning capacity, reserve accumulation, and stock-flow external constraints. The Fed’s evidence on the continuing centrality of the dollar and the BIS evidence on the scale of offshore dollar credit suggest that this integrated system is still in place; the open question is how durable that architecture will remain under intensifying geopolitical fragmentation.
The most reasonable conclusion, then, is a qualified one. Obstfeld is probably right for the world created by decades of globalization: a world in which large inherited dollar balance sheets and offshore financial intermediation weaken any simple one-for-one link between foreign demand for dollar assets and the US current-account deficit. But that does not abolish the external constraint. It merely makes it more indirect, more balance-sheet driven, and more dependent on the continued openness and credibility of global dollar markets. If geopolitical risk gradually undermines that openness, then the limits of offshore dollar finance will become more visible, and the broader stock-flow logic behind external adjustment may reassert itself more forcefully than the current debate often admits.
References
Obstfeld, Maurice. “Don’t Blame America’s Current Account Deficit on the Dollar.” PIIE Realtime Economics, April 13, 2026.
Bertaut, Carol C., Chiara Bucciarelli, Alain Chaboud, Andrew E. Clark, Kathryn Ford, and Steve Kamin. “The International Role of the U.S. Dollar – 2025 Edition.” Federal Reserve, July 18, 2025.
He, Dong, and Robert McCauley. “Eurodollar Banking and Currency Internationalisation.” BIS Quarterly Review, June 2012.
Bank for International Settlements. “Global Liquidity Indicators at End-September 2025.” January 29, 2026.
Board of Governors of the Federal Reserve System. “Central Bank Liquidity Swaps.”