Neal’s remarks come as President Joe Biden and Republican congressional leaders wrangle over whether and under what terms to increase the U.S. debt ceiling to avoid a default. A failure by the U.S. to pay its debts would likely roil credit markets worldwide and potentially trigger a severe recession, according to U.S. Treasury officials. The partisan jockeying over the debt limit is closing in on a June 1 deadline.

Policymakers’ decisions will determine whether the U.S. dollar continues to be the dominant global currency, Neal said, and she pointed to the domestic benefits that flow from that being the case.

“The widespread use of the dollar reduces transaction and borrowing costs for U.S. households, businesses, and the government,” Neal said. “In addition, it helps reduce the cost of hedging for domestic households and businesses, since they do not face direct exposures to currency risks.”

She also noted the benefits to the global economy. “Dollar assets offer foreign investors stability in value and relative safety, as the dollar tends to appreciate during periods of market stress,” she said. “It also provides access to the liquidity of U.S. financial markets, such as the U.S. Treasury market, which is the deepest and most liquid securities market in the world.”

In addition to being the most widely used currency in the world, the dollar is the most common currency in foreign exchange reserves, cross-border loans, international debt securities, payments via the international messaging service Swift and trade invoicing.

The U.S. and the Fed are increasingly focused on improving cross-border payments. With the coming launch of the FedNow real-time payments system, those instant payment services will only be available for the U.S. initially, but the central bank is also considering how it could support them internationally in the future, said Nick Stanescu, who is managing that Federal Reserve program.

Nonetheless, the Fed also recently noted its plans to end its cross-border automated payment service for Canada and Europe due to the lack of customers, but also as a result of increasing competition in such payment services.

Meanwhile, the Federal Reserve has also been exploring the concept of a central bank digital currency. In November, the New York Innovation Center, a joint effort between the Federal Reserve Bank of New York and the Bank for International Settlements Innovation Hub, said that it tapped major banks, including Citigroup, Wells Fargo, BNY Mellon and HSBC as well as card network company Mastercard to participate in its digital currency research.

“The U.S. dollar continues to play multiple critical roles in the global economy, with significant benefits to households and businesses both domestically and abroad,” Neal said. “But as the global financial system continues to evolve, there is frequent discussion of potential ways these roles can be challenged.”

She cited potential rivals. “Recent years have been characterized by investor interest in other reserve currencies, less traditional alternatives, such as central bank digital currencies and other digital assets, and even commodities, such as gold,” she said. “With this in mind, the central role of the U.S. dollar should not be taken for granted.”