The role of the dollar as an international currency

Some recent projects: papers by Chinn, Frankel and Ito and Kamin and Sobel; Speech by Mark Koplovich Tuesday.

go through Chin, Frankel, and Ito (2024)update Chinn and Frankel (2007, Year 2008), regarding central bank reserves:

figure 1: Foreign exchange held by the central bank is divided by currency. Values for Q3 2023. source: Chinn, Frankel, Ito (February 2024).

from KAmin and Sobel, “The dollar’s dominance will remain for the foreseeable future—the real question for the global economy is how and why”.

Here is a partial list of sanctions the United States and other G7 countries have imposed on Russia since its invasion of Ukraine:

financial sanctions

Russia freezes $300 billion in international reserves

Ban US/Russian IMF SDR transactions

Well-known Russian banks removed from SWIFT

Freezing U.S. assets of some Russian banks

Ban U.S. agencies from handling Russian debt payments

Trade restrictions and export controls

oil price ceiling

Not all of these sanctions depend on the dominance of the U.S. dollar in the international financial system, but many of them do. In particular, actions to cut off Russia's dollar transactions or freeze its dollar assets could cause significant damage to its economy and would be a useful complement to other diplomatic and strategic approaches by the United States and the West.

Some critics complain that this “weaponization” of the dollar by the United States could undermine the dollar's dominance by forcing countries to use other currencies to evade sanctions. Governments are increasingly using financial sanctions, especially after the 9/11 attacks. Policymakers view financial sanctions as a powerful and useful “stick” in addition to war, complementing the “carrot” of diplomacy. Excessive or abusive financial sanctions may accelerate foreign inclinations to use alternatives to the dollar—for example, European efforts to establish alternative payment mechanisms after the United States abandoned the Joint Comprehensive Plan of Action against Iran.

But again, America’s broad alliance structure significantly slows this development. Furthermore, when financial sanctions are imposed multilaterally in coordination with our allies rather than unilaterally, are imposed with restraint, and are used solely to respond to egregious behavior and promote strategic objectives, any adverse impact on the financing and reserve role of the U.S. dollar should be avoided. decrease very much. In contrast, we believe that the United States' overuse, if not abuse, of financial sanctions will undermine the effectiveness and ability to use this tool in the future.

In short, concerns about using financial sanctions to seriously damage the dollar's status are overblown. First, as noted above, only a small group of countries are likely to seek alternatives to the U.S. dollar as a result of sanctions. Most developed economies have close ties with the United States, either through political/military arrangements such as NATO, economic arrangements such as the G7 or OECD, or through shared values such as respect for democratic norms. Many emerging market and developing countries also have close political relations with the United States, even if some of them choose to maintain relations with countries that have tense relations with the “West.” Finally, for all of these countries, the size of the U.S. economy as a market for goods, services, and investments cannot be underestimated. Few countries are willing to risk losing substantial access to the U.S. market. These considerations not only underpin the effectiveness of U.S. sanctions but also ensure that the implementation of these sanctions will not jeopardize the dominance of the U.S. dollar.