Financial dollarisation means bank deposits and loans are denominated in a foreign currency even though everyday transactions are not. It matters because it decides whose interest rate reaches savers. In Uruguay the International Monetary Fund records dollarisation at about 70 per cent of banking system liabilities and around 53 per cent of loans, and its 2025 estimates found that a rise in the domestic policy rate has no statistically significant effect on peso deposits, while dollar deposits fall when the US federal funds rate rises.
A country can spend in one currency and save in another. That arrangement is easy to miss, because nothing about it is visible in a shop, and it is the version of dollarisation that does the most to a central bank.
Key Takeaways
- Financial dollarisation is about deposits and loans, not banknotes, and a visitor will see no sign of it.
- In Uruguay it runs at about 70 per cent of banking system liabilities and around 53 per cent of loans.
- A policy rate only prices the currency it is set in, so most of the country's savings sit outside its reach.
- Fund estimates find no statistically significant effect of the Uruguayan policy rate on peso deposits, while dollar deposits respond to the US federal funds rate.
- The loan side has de-dollarised considerably over time. The deposit side has barely moved.
What is actually dollarised
The balance sheet, and the distinction is between two different things that share a name.
Cash dollarisation is foreign banknotes circulating and being accepted for everyday payment. It is a response to a currency people will not hold at all, and it is visible from the street.
Financial dollarisation is the one this guide is about, and it is invisible from the street. It concerns what is written on a bank's books: the currency deposits are denominated in, and the currency loans are written in. A country can carry a great deal of it while its shops, wages and prices run entirely in the local unit, because the two things are decided by different people for different reasons. A shopkeeper decides what to accept. A depositor decides what to hold for years.
That second decision is the one that survives good conditions. Cash dollarisation recedes when a currency becomes usable again; financial dollarisation can persist in a country with low inflation, a credible central bank and a currency nobody is running from, because what it reflects is a long-term preference about safety rather than a judgement about this week.
Uruguay is that case. The Fund's 2025 consultation describes a banking system that is well capitalised, highly liquid and profitable, with non-performing loans at 1.5 per cent of total loans and provision coverage of 234 per cent, and in the same paragraph records that dollarisation remains high, at 70 per cent for liabilities and around 53 per cent for loans.
Why that narrows what a central bank can do
Because a policy rate is a price for one currency only.
When a central bank moves its rate it is changing the return on deposits denominated in its own money and the cost of loans written in it. Savings held in a foreign currency are unaffected: their return is set by the interest rate of the country that issues it. So the fraction of the financial system a rate decision actually reaches is roughly the fraction denominated locally, and everything else responds to somebody else's decisions.
That is not a theoretical point in Uruguay's case, because the Fund put numbers on it. Its 2025 estimates of the bank lending channel found that a one percentage point reduction in the policy rate would increase peso bank credit by only about 0.15 per cent, which is less than 0.05 per cent of total credit. On the deposit side the result is sharper still: increases in the policy rate do not have a statistically significant effect on peso-denominated deposits, while dollar-denominated deposits decline in response to a higher US federal funds rate.
Read that second sentence carefully, and read what it does and does not establish. A statistically insignificant estimate is not proof that the domestic rate does nothing; it is a failure to detect an effect in that data. What the significant half shows is narrower and still striking: the rate that was found to move Uruguayan dollar deposits is set in Washington, not in Montevideo. The Fund's own reading is that when dollar returns rise, savers find alternative profit opportunities outside the financial sector, which is a statement about money leaving the banking system rather than moving within it.
The two sides of the balance sheet are not moving together
No, and the asymmetry is the interesting part.
| Measure | Earlier in the Fund's series | Most recent |
|---|---|---|
| Foreign-currency loans, share of total loans | About 65 per cent | About 53 per cent |
| Foreign-currency liabilities, share of total liabilities | About 74 per cent | About 69 per cent |
Lending has de-dollarised considerably, which is what the exchange rate margin on a foreign-currency loan is ultimately protecting against. Borrowing in a currency you do not earn is the position what it means to import another country's monetary policy describes at the level of a whole economy. The Fund attributes the growth of bank credit since 2010, roughly 10 per cent of gross domestic product, primarily to an increase in credit denominated in pesos and to greater lending to corporations. Deposits have barely shifted.
There is a reason the two behave differently. A borrower's currency choice is disciplined by a real risk: borrowing in a currency you do not earn is a bet, and both regulators and firms have reason to reduce it. A depositor faces no equivalent pressure. Holding savings in a foreign currency is a preference about where value is safest, and preferences of that kind outlast the conditions that formed them.
The authorities described the task to the Fund in exactly those terms, calling for an ambitious de-dollarisation agenda intended to break with habits.
What is being tried
Competition first.
The central bank has begun revamping its de-dollarisation strategy, and the Fund records the first step as a legislative proposal focused on increasing competition in the local-currency deposit market. That is a notably indirect instrument. It does not restrict foreign-currency deposits or penalise them; it tries to make the local-currency alternative better paid.
Alongside it sits the exchange rate itself. The Fund's advice is that the rate should continue to act as a shock absorber, with foreign exchange intervention used only to respond to disorderly market conditions, and the authorities have said they intend to run it that way. A floating exchange rate that is genuinely allowed to move is part of a de-dollarisation strategy rather than a complication for it: a currency that is held at a level teaches savers that holding the foreign one is free of risk, which is precisely the habit the agenda is aimed at.
The Fund also recommends further emphasising in public communications that the inflation target is 4.5 per cent, and aligning the appointment of board members with international practice through fixed terms that do not overlap the electoral cycle. Credibility and dollarisation are the same problem viewed from two ends.
What this changes for a conversion from Australia
It explains why a currency can look stable and still be quoted with unusual care by the people who use it.
A country with dollarisation of this kind has a domestic constituency that thinks in a foreign unit for anything long-dated. Property, savings and large purchases are mentally denominated elsewhere, and the local currency does the day-to-day work. For the Australian dollar to Uruguayan peso pair the practical consequence is that both currencies in it are being measured, by many of the people on the other side, against a third one.
Where to look next
why a central bank defines price stability as a ceiling covers a different constraint on what a monetary authority can promise. For the live figures, see the AUD to UYU page.
Sources
- International Monetary Fund, Uruguay: 2025 Article IV Consultation, Country Report No. 25/287 - dollarisation at 70 per cent of liabilities and around 53 per cent of loans, the financial soundness table showing foreign-currency loans falling from about 65 to about 53 per cent of total loans and foreign-currency liabilities from about 74 to about 69 per cent of total liabilities, non-performing loans at 1.5 per cent with 234 per cent provision coverage, Box 4's estimate that a one percentage point cut in the policy rate raises peso credit by about 0.15 per cent or under 0.05 per cent of total credit, the finding that policy rate increases have no statistically significant effect on peso deposits while dollar deposits decline in response to a higher US federal funds rate, bank credit growth of about 10 per cent of GDP since 2010 driven primarily by peso credit, the revamped de-dollarisation strategy beginning with competition in the local-currency deposit market, the authorities' description of an ambitious agenda to break with habits, the exchange rate as a shock absorber, the 4.5 per cent inflation target and the recommendation on fixed board terms
- International Monetary Fund, IMF Executive Board Concludes 2025 Article IV Consultation with Uruguay - the board's welcome of the renewed de-dollarisation efforts
- International Monetary Fund, Uruguay: Staff Concluding Statement of the 2025 Article IV Mission - the mission's statement of the same policy advice
General information about financial dollarisation and monetary policy transmission. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
What is the difference between cash dollarisation and financial dollarisation?
Cash dollarisation is foreign banknotes circulating and being accepted for everyday payment, and it is visible at any till. Financial dollarisation is on the bank's books: the currency deposits are denominated in and loans are written in. A country can carry a great deal of the second with very little of the first, and the two have different causes. Cash dollarisation is a response to a currency people will not hold; financial dollarisation can persist under low inflation and a credible central bank.
How dollarised is Uruguay?
On the International Monetary Fund's 2025 figures, dollarisation runs at about 70 per cent for banking system liabilities and around 53 per cent for loans. Foreign-currency loans as a share of total loans have fallen over the period the Fund tabulates, from roughly 65 per cent to about 53, while the liability share has moved much less, from about 74 per cent to about 69.
Why does saving in a foreign currency weaken monetary policy?
Because the policy rate is the price of the local currency, and a deposit denominated in something else is not priced by it. The central bank can raise its rate and leave the return on most of the country's savings untouched, so the usual channel from a rate decision to saving, borrowing and spending is narrowed to whatever share of the system is denominated locally.
Has that been measured?
Yes, and the result is unusually direct. The Fund's 2025 Article IV consultation reports that increases in the Uruguayan policy rate do not have a statistically significant effect on peso-denominated deposits, whereas dollar-denominated deposits decline in response to a higher US federal funds rate. It reads that decline as savers finding profit opportunities outside the financial system when dollar returns rise.
What is Uruguay doing about it?
The central bank has begun revamping its de-dollarisation strategy, and the first step is competition rather than compulsion: a legislative proposal aimed at increasing competition in the local-currency deposit market. The authorities described the wider objective to the Fund as an ambitious de-dollarisation agenda intended to break with habits, which is a fair description of what the problem is made of.