The US Dollar May Be the Next Casualty of the Ukraine War
The United States’ economic sanctions on Russia may undermine the US dollar’s global dominance, says the American “Jacobin” Magazine.
Just last month, the International Monetary Fund’s (IMF) first deputy managing director, Gita Gopinath, warned that Western sanctions could undermine the global dominance of the US dollar. While the dollar’s global reserve currency status, an important element of US global primacy, will remain for the medium term, she told the Financial Times, “fragmentation at a smaller level is certainly quite possible,” which will translate into “low-moving trends towards other currencies playing a bigger role” as reserve assets. Gopinath had previously served as the IMF’s chief economist for three years.
A short explainer is in order here. Since World War II, the US dollar has served as the world’s reserve currency — the currency predominantly used by other countries for foreign transactions and to anchor their own currencies. The US dollar is used everywhere today for international trade and investment, issuing debt, foreign exchange trading, and more. Among other things, this confers on the United States what has been termed an “exorbitant privilege”: it can run up chronic trade deficits by importing more than it exports with little fear of seeing its exchange rate collapse or its interest rates explode. And now, some informed observers think that privilege could be under threat.
Gopinath is by no means the only one. The same week, Goldman Sachs warned in a research note that the dollar was facing similar challenges as those that saw the British pound go out of favor in the middle of last century. The note pointed to the United States’ large and consistent trade deficits, but a Goldman analyst also cautioned that “ongoing geopolitical uncertainty” made “official de-dollarization efforts” aimed at “reduc[ing] exposure to dollar-centric payment networks” more likely, posing a long-term risk to the dollar’s status.
The Institute for the Analysis of Global Security (IAGS) — a think tank founded by a former CIA director and Ronald Reagan advisor, and stacked with establishment figures like ex-NSA director Keith Alexander and former NATO commander Wesley Clark — has issued a similar warning. Washington’s “extremely trigger-happy” sanctioning of Russia, codirector Gal Luft told CNBC, means that “central banks are beginning to ask questions” and wonder if they’re “putting all their eggs in one basket” by relying so heavily on the dollar.
For many years, undermining the dollar’s dominance has been the dream of governments that have looked uneasily at US global primacy, and formed coalitions like BRICS (Brazil, Russia, India, China, and South Africa) to get there, making little progress on the whole. It would be the irony of ironies if the biggest blow to this system was a self-inflicted one.
https://jacobinmag.com/2022/04/us-dollar-ukraine-war-global-dominance-currency-sanctions-russia