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Washington, May 6 – Just days after US Secretary of Treasury Janet Yellen acknowledged that the use of sanctions ran the risk of undermining the “hegemony” of the dollar in April, the Biden administration announced new sanctions against Russian and Iranian entities for illegally detaining Americans.
The US is aware of the downsides of sanctions, which it tends to use as a foreign policy weapon, but officials and experts have indicated that they believe the dollar is not likely to be upstaged by any one currency or a bunch of them any time soon because, among other reasons, there are no alternatives.
“Where are they going to move?” Larry Summers, a former treasury secretary, asked in an interview with Bloomberg end-April. The euro cannot become an alternative as long as the US collaborates its sanctions with Europe, which it has. And for “anybody who’s looking for political stability, who’s looking for predictability, who’s looking for the nonpartisan, objective adjudication of their claims — are they really going to hold large quantities of assets in RMB,” he said referring to the Chinese currency Renminbi. “I doubt it.”
The dollar has indeed lost status as a currency for global trade and exchange. Its share of the global foreign-exchange holdings had fallen 58 per cent, its lowest since 1995, the International Monetary Fund said in April. Some experts have offered a more dire and precipitous version of the dollar’s decline.
Washington DC sees the de-dollarisation as a decades-long effort by Russia and China chiefly, to insulate their economies from US sanctions (of which there have been plenty), reduce exposure to the effects of US economic and monetary policy, and assert global economic leadership, as stated in a report prepared by the Congress Research Service (CRS), an autonomous body that provides research guidance on policy issue to US congress.
De-dollarisation efforts by Russia and China figured in several CRS reports directly and indirectly on US ties with the two countries and between them. One report from 2021 noted that these efforts have “minimal changes to date”, but, it warned, “if they are able to more significantly reduce their use of the dollar in the future, for example by expanding non-dollar trade or developing a digital currency, there could be implications for the United States.”
Despite all that China is doing to undermine the dollar, its own unflagging faith in the American currency is reflected in its holdings of foreign exchange reserves – 50 per cent – 60 pe cent of them are dollar-denominated assets. On the other hand, central banks around the world hold only 2 per cent of their foreign exchange reserves in Renminbi, the tightly controlled Chinese currency.
De-dollarisation doesn’t appear to be very high on the list of priorities for the Biden administration, as was the case for preceding dispensations. When asked about Brazil and Argentina’s decision in March to adopt a common currency and whether the US was concerned about China’s push for de-dollarisation, the state department spokesperson said, “Countries are going to make their own sovereign decisions as it relates to relationships with any country in the world, including the PRC (People’s Republic of China).”
Yellen displayed a similar lack of urgency when she warned against excessive sanctions. “There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar,” she had said, but added, “Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative. “But the dollar is used as a global currency for reasons that are not easy for other countries to find an alternative with the same properties.”
There is indeed no currency currently that can dethrone the dollar, though a movement towards a multi-currency global economy is possible over the long term.
But in the short term, Charles Schwab, an American brokerage and banking firm that argues that the dollar cannot be easily replaced, has said, “A reserve currency needs to be freely convertible and have deep and liquid bond markets to be considered safe for foreign central banks to hold. Central banks need to know that their money is easily and readily available when needed, particularly in times of stress.
“The US, with a large, open, and liquid market for Treasury securities, fits that role. That’s why when the Covid crisis hit the global economy, the US Federal Reserve expanded its swap lines with foreign central banks to enable access to dollars for countries that were struggling to access dollars for trade and debt payments.”
It has gone on to say that Europe’s bond markets are more fragmented than the US market, Japan’s bond market is closely controlled by its central bank, and China has capital controls, and its currency isn’t even freely convertible.