ArgumentsHow a Weaponized Dollar Could Backfire
United States foreign policy under President Donald Trump continues to run counter to America’s traditional post-war objectives. Should the U.S. carelessly relinquish leadership of the global multilateral order, the dollar might eventually lose its own long-standing primacy.
The language of international monetary policy has turned militaristic. The phrase “currency war” has now been popular for a decade, and the United States government’s more recent “weaponization” of the dollar is generating controversy. But ironically, a martial approach could end up threatening the U.S. currency’s global dominance.
Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University, writes in Project Syndicate:
This is a good time to gauge the relative strengths of the dollar and rival international currencies (meaning currencies that are used outside their home countries). In September, the Bank for International Settlements released its triennial survey of turnover in global foreign-exchange markets. The International Monetary Fund’s statistics on central-bank holdings of foreign-exchange reserves have become much more reliable since China began reporting its holdings. And the SWIFT payments system issues monthly data on the use of major currencies in international transactions.The bottom line is that the U.S. dollar remains in first place by a wide margin, followed by the euro, the yen, and the pound sterling. Some 47% of global payments currently are in dollars, compared to 31% in euros. Furthermore, 88% of foreign-exchange trading involves the dollar, almost three times the euro’s share (32%). And central banks hold 62% of their reserves in dollars, compared to just 20% in euros. The dollar also dominates on other measures of currency use in trade and finance.
Frankel notes that the Trump administration carelessly ignored rules and norms which previous administrations helped fashion, with long-term detrimental consequences for the United States. He writes:
The “weaponization” of the dollar generally refers to the US government’s exploitation of the currency’s global dominance in order to extend the extraterritorial reach of U.S. law and policy. The most salient example is the Trump administration’s enforcement of economic sanctions against Iran in an attempt to shut the country out of the international banking system, and in particular SWIFT.
Even before Iran agreed to halt its nuclear weapons program under the 2015 nuclear deal, Europeans occasionally grumbled about U.S. extraterritoriality, suspecting that the U.S. might be quicker to impose large penalties on European banks than on their American peers for violating sanctions. But, because Trump abrogated a treaty that Iran was not violating, enforcing U.S. sanctions via SWIFT is a real abuse of the exorbitant privilege. Arguably, it can no longer be justified in the name of a global public good.
Faced with US sanctions, Russia shifted its reserves out of dollars in 2018 and is selling its oil in non-dollar currencies. Likewise, Europe or China may succeed in developing alternative payment mechanisms that would allow Iran to sell some of its oil. That might in turn undermine the dollar’s role in the long run.
More generally, U.S. foreign policy under Trump continues to run counter to America’s traditional post-war objectives. The prospect might seem a distant one, but should the US carelessly relinquish leadership of the global multilateral order, the dollar might eventually lose its own long-standing primacy.
