Sanctions hurt the dollar too
The US Dollar owes its global dominance to several factors but most of all perhaps to market liquidity, suggests research from Stanford University. This argues that “firms optimally choose to denominate their debt in the unit of the asset that is easiest to obtain”, which currently means the US currency. Other factors are also important, such as global trust in US institutions and the rule of law. The Dollar remains the most traded currency by far. However, although the Dollar’s share of global reserves remains high it has fallen since the start of this century.
Dollar share of global reserves
The Dollar’s dominance is now under sustained attack, primarily by the BRICS countries – Brazil, Russia, India, China and South Africa. While the Dollar is under no immediate danger of losing its status, Gita Gopinath, the First Deputy Managing Director of the International Monetary Fund (IMF), has warned that the use of sanctions – particularly against Russia – risks diluting the Dollar’s position as the international reserve currency. The US Treasury Secretary, Jane Yellen, said much the same this month in a TV interview. In the early 1990s sanctions by the US, the European Union, Japan and the UK, were imposed on 10% of all countries. Today the figure is 30%.
The global order is shifting – the decision by South Africa to pull out of the International Criminal Court (ICC), following the ICC issuing a warrant for the arrest of President Vladimir Putin, is indicative of changing allegiances. Putin is scheduled to attend a BRICS meeting in South Africa in August; if it were still a member of the ICC South Africa would be expected to arrest him.
The weaponization of the Dollar via sanctions is proving a double-edge sword. The cutting-off of Russia’s central bank, sovereign wealth fund, banks and certain individuals from access to US Dollar transactions has damaged the Russia economy certainly; but it is also weakening ties with former currency allies such as the Philippines and Thailand, which have made trade deals based on currencies other than the Dollar. Saudi Arabia, which together with the US gave birth to the petrodollar, is now reportedly selling some crude oil to China for Yuan. Sanctions are also strengthening the hand of countries looking to launch their own digital currency, the number of which has tripled since 2020.
The US and its allies in the fight to strengthen Ukraine against Russia may have felt that the imposition of sanctions on Russia was pain-free and certainly preferable to direct military intervention. Weaponizing the Dollar is not pain-free. Countries around the globe can now see the risk of depending on the Dollar; it should surprise no-one that the policy of having all their eggs in one basket no longer seems wise.
There is no obvious paper currency to take over from the Dollar right now. It’s therefore worth reminding ourselves that gold has re-entered the minds of many central bankers, who are buying more gold now than at any time since data collecting began, in 1950. This buying surge is surely one factor behind the rise in the gold price. Brazilian president Luiz Inácio Lula da Silva said recently when he visited a fellow BRICS country, China, said: “Every night I ask myself why all countries have to base their trade on the dollar”. For long it was the case that there was ‘no alternative’ to the Dollar; countries that are determined to throw off US political hegemony are starting to think about ridding themselves of the Dollar yoke as a first step.