The US Weaponizing the Dollar: Unveiling Motives and Implications

The US Weaponizing the Dollar: Unveiling Motives and Implications

Ira Singh
14 June’23

In recent years, the United States has faced increasing scrutiny and accusations of weaponizing the dollar, a practice that involves utilizing the dominance of the US dollar in global financial markets to advance its geopolitical interests. This strategy has drawn both praise and criticism from various stakeholders worldwide, and its motives and implications have become subjects of intense debate.

The US accounts for some 20% of global economic output, but more than a half of world currency reserves are in dollars, and the bulk of cross-border transactions are carried out with the use of the currency. This helps the greenback maintain its leading position among the world’s reserve currencies.

Immediate replacement of the dollar is not likely, most economists believe. However, the Chinese yuan is often mentioned as the dollar’s major rival due to its growing share in international trade settlements, along with the expansion of the Chinese economy. At the same time, economists note the lack of transparency in China’s financial system and the fact that the yuan is not fully convertible. The Indian rupee has also been named as a contender. As for the euro and the Japanese yen, experts have raised doubts on their long-term future and stability due to economic issues in the EU and in Japan.

Economists, including US Treasury Secretary Janet Yellen, have been warning that unilateral sanctions imposed by Washington on nations across the globe will sooner or later undermine the hegemony of its currency. The managing director of the International Monetary Fund (IMF), Kristalina Georgieva, has also said that the dollar is gradually losing its top status. The warnings come in the wake of a multi-decade gradual decline in the dollar’s share of global central bank reserves. International rating agency Moody’s stated recently that deepening geopolitical tensions are among the issues that could threaten the greenback’s dominance. It added, however, that the currency’s role would persist for decades despite the challenges.

Could sanctions on Russia backfire on dollar?
The relationship between the United States and Russia has been strained for years due to various geopolitical issues, including conflicts in Ukraine, alleged election interference,and differences over strategic interests.

The imposition of sanctions by the United States on Russia has set in motion a global revolt against the US dollar,as countries and entities seek alternatives to reduce their dependence on the dominant currency.These sanctions, driven by geopolitical tensions and disagreements, have triggered a series of reactions and initiatives aimed at challenging the long-standing supremacy of the US dollar in the international financial system.

Global Reaction to Sanctions:

The impact of the US sanctions of on Russia have reverberated globally, promoting nations and entities to reassess their reliance on the US dollar and explore alternative financial mechanisms.Here are some significant developments:

De-Dollarization Efforts: Nations affected by US sanctions, such as Russia and Iran, have intensified their efforts to reduce their dependence on the US dollar. They have pursued currency swap agreements, increased bilateral trade conducted in national currencies, and established alternative payment systems to bypass the US-dominated financial infrastructure.

Rise of Digital Currencies: The sanctions have accelerated interest in digital currencies, such as cryptocurrencies and central bank digital currencies (CBDCs), as potential alternatives to the US dollar. Some countries have initiated pilot projects to explore the use of digital currencies for cross-border transactions, aiming to mitigate the impact of US sanctions.

Regional Payment Systems: Countries seeking to circumvent the dominance of the US dollar have explored regional payment systems and mechanisms. For example, the creation of the Eurasian Economic Union’s own payment system, the Eurasian Payment System (EPS), aims to facilitate trade among member states using local currencies, reducing reliance on the US dollar.

Strengthening of Regional Alliances: Sanctions against Russia have prompted countries to strengthen regional alliances and economic cooperation to counterbalance US influence. Initiatives like the Belt and Road Initiative led by China and the creation of the Asian Infrastructure Investment Bank (AIIB) have gained momentum, challenging the traditional dominance of the US and the dollar.

Motives behind Weaponizing the Dollar:

Geopolitical Influence : The United States, as the world’s largest economy, aims to maintain and expand its global influence. By weaponizing the dollar, the US government can exert significant control over international financial transactions, making it a powerful tool in shaping global politics and advancing its foreign policy goals.

Economic Interests: As the issuer of the world’s primary reserve currency, the US benefits from the dollar’s status as a safe haven and preferred medium of exchange. Weaponizing the dollar enables the US to safeguard its economic interests by imposing sanctions, restricting access to the US financial system, and manipulating international trade flows to its advantage.

National Security Considerations: The US views the weaponization of the dollar as a means to protect its national security. By utilizing its financial leverage, the US can target entities involved in illicit activities, including terrorism, money laundering, and nuclear proliferation, thereby disrupting their operations and reducing potential threats.

Implications of Dollar Weaponization:

The unprecedented US-led sanctions freezing Moscow’s ability to use half of its reserves, as well as limiting the ability of Russian banks to conduct transactions via the SWIFT messaging system could have a boomerang effect, some analysts say. According to them, many countries, especially those in the crosshairs of restrictive US measures, have raised concerns that those measures could be used against them in the future and could impact the functioning of their economies.

Global Financial Dependence: The US dollar’s dominance grants the United States immense influence over other countries’ economic and financial stability. Nations heavily reliant on the dollar for trade and reserves face vulnerability, as any disruptions or sanctions imposed by the US could significantly impact their economies.

Extraterritorial Reach: Weaponizing the dollar allows the US to extend its jurisdiction beyond its borders, asserting control over transactions involving non-US entities. This extraterritorial reach has been a source of contention, as it challenges the sovereignty of other nations and can strain international relationships.

Potential Alternatives : The weaponization of the dollar has prompted calls for diversification away from the US currency. Countries and entities seeking to reduce their exposure to US influence have explored alternative payment systems and currencies, such as digital currencies and regional arrangements, to reduce their vulnerability to potential US sanctions or restrictions.

Geopolitical Tensions: The use of the dollar as a weapon has contributed to geopolitical tensions and conflicts. Sanctions and financial restrictions imposed by the US can exacerbate existing disputes and trigger retaliatory measures, leading to a destabilization of global economic relations.

Could BRICS challenge the US currency?
The status of the US dollar as the global kingpin could be challenged in time and under certain circumstances by the BRICS group of emerging countries, according to some experts, including the former chairman of Goldman Sachs, Jim O’Neill. The economic bloc, comprising Brazil, Russia, India, China and South Africa, has already outpaced the G7 in economic growth. Their push towards trade in national currencies and efforts to establish a joint payment network to cut reliance on the Western financial system, and particularly on the dollar, have been gaining traction.

The Implications of Losing Reserve Status: What Happens if the Dollar Declines

The US dollar has long enjoyed the status of the world’s primary reserve currency, providing numerous advantages to the United States and shaping the global financial system. However, the hypothetical scenario of the dollar losing its reserve status raises significant questions about the potential implications and consequences for the global economy.While the hypothetical scenario of the dollar losing its reserve status raises numerous questions, the implications would extend beyond the economic sphere.Currency volatility(decline in demand for the currency and a possible depreciation of its value),shifts in global economic power, impact on US financial markets, reshaping of the global financial architecture, changes in trade dynamics & geopolitical realignments would all be significant factors to consider. While the dollar’s reserve status remains intact for now, understanding the potential consequences of a changing global financial landscape is crucial for policymakers, businesses, and individuals alike.

The weaponization of the US dollar underscores the intricate relationship between finance, geopolitics, and power. While the practice enables the United States to project influence and safeguard its interests, it also generates concerns about global financial dependence, extraterritorial reach, and the potential erosion of trust in the international monetary system. The implications of this strategy are complex and have far-reaching consequences that continue to shape the dynamics of the global economy and international relations.