Many emerging market business loans are denominated in dollars, according to loan-level currency and credit cost data. The popularity of dollar credit is not due to exchange rate expectations. Dollar-denominated loans have a 2% lower annual interest rate than local currency loans, as in the deposit market. Local depositors prefer dollar deposits and the banking sector has a strong incentive to align foreign currency assets and liabilities, thus dollar loans are preferred. Market rivalry makes banks pass through this interest rate gap.

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