Consequences of American Policy on “Weaponizing the Dollar” in the Global System

In July 1944, the Bretton Woods Conference convened, gathering 44 nations and a group of economic policymakers aimed at curbing speculation in international currencies and finding ways to deepen international economic integration and cooperation. In the aftermath of the conference, the strength of the U.S. dollar began to rise as the reference currency for most cross-border transactions, starting with countries’ central banks, extending to companies and international institutions, and reaching international trade. Following the end of the Cold War in the 1990s, the U.S. dollar continued to dominate currency markets as a global reserve currency and a foundational pillar of the global financial system; thereby reinforcing its position in global markets.

As a result, the United States has been able to use the dollar as a strategic weapon, “weaponizing the dollar” through financial sanctions against certain countries such as Russia following the onset of the Ukrainian war in February 2022. However, in response, some central banks and governments around the world have begun to search for alternative currencies to avoid being impacted by dollar weaponization policies, which could potentially lead to a decline in the dollar’s global supremacy and, consequently, American influence worldwide.

In this context, Bloomberg News correspondent Saleha Mohsin discusses in her book “Paper Soldiers: How the Weaponization of the Dollar Changed the World Order,” released in 2024, the employment of American policy regarding the dollar as an economic weapon and the intended and unintended consequences of this, including the rise of populist sentiments and the trade war with China. She connects the weaponization of the dollar since the events of September 11 with the imposition of financial sanctions against Russia, concluding that the strength and influence of the U.S. dollar is now in jeopardy.

The Rise of the Dollar:

The book highlights the journey of the dollar as a global currency, starting from its first legal tender use for paper currencies in the U.S. in 1862, passing through the Bretton Woods Conference, which resulted in the establishment of the International Monetary Fund and the World Bank, and culminating in the solidification of the dollar’s status as the currency for global reserves and a basic unit of account in international trade.

Between the 1970s and the 1990s, the U.S. Treasury directed the Federal Reserve to buy or sell dollars to stabilize the currency with the assistance of trade partners who would benefit from the stability of the dollar, such as the Plaza Accord of 1985 aimed at devaluing the dollar; which in turn boosted the sales of American products both domestically and abroad. However, with increasing flows of international trade, the side effect of undermining the dollar’s growth created political risks and a state of stagnation, leading to the cessation of dollar devaluation policies in 1987. In this context, the book refers to former President Bill Clinton’s decision in the 1990s to buy Japanese yen and sell dollars to ensure global financial stability, which was considered a violation of the American philosophy of free trade.

In 1995, then-Treasury Secretary Robert Rubin mandated the Clinton administration to cease intervention in currency markets, thereby allowing the dollar to grow as much as possible, under the principle that “a strong dollar is in the interest of the United States.” In other words, dollar strength benefits both the American economy and the world at large. After Clinton’s administration, a question arose as to whether the “strong dollar” principle was a Democratic tenet or a bipartisan slogan. It is noted that Paul O’Neill, the first Treasury Secretary in George W. Bush’s Republican administration, adhered to this principle; thus, the “strong dollar” became a U.S. financial policy for the next thirty years, regardless of the ruling party, leading to exceptional prosperity and the proliferation of cheap foreign goods.

In line with the dollar’s international status, the U.S. has enhanced this strength by using it as a means of American foreign policy to protect its national security interests, especially after the events of September 11, 2001. Then-President George W. Bush granted the U.S. Treasury the authority to impose economic sanctions on those he deemed to be financing terrorist activities. Since then, the U.S. Treasury has controlled foreign currency reserves of other countries and restricted access to the dollar-based Global Financial Messaging System (SWIFT).

U.S. Treasury officials succeeded in elevating the department beyond its traditional role of handling only economic growth and international economic diplomacy to become a key player at the United States’ national security table by using the dollar as a tool of American foreign policy. By 2004, the Treasury included three main units: domestic finance relating to debt, taxation policy, and regulations; financial regulation; and international affairs, which encompassed all currency policy matters in the G20 and G7, along with the Office of Terrorism and Financial Intelligence (TFI).

In this regard, the United States has adopted the tool of sanctions to punish international adversaries, such as Washington’s attempt to curb Iran’s nuclear program in 2012 by preventing anyone dealing with the country from using the dollar, a policy that resulted in the devaluation of the Iranian national currency and pushed millions of Iranians into poverty.

Unintended Consequences:

Although a “strong dollar” has bolstered confidence in the American currency and allowed American consumers to enjoy cheap imports, the author points out that the excessively high dollar value made American exports, such as steel and textiles, more expensive; thus, less attractive to foreign buyers and less competitive against other products like Chinese imports. This harmed American producers since their goods became pricier for foreign buyers. Due to the dollar gaining over 10% of its value between 1998 and 2002, the U.S. lost 2.6 million manufacturing jobs during that period; thus, “strong dollar policies” adversely impacted the American industrial sector.

For the rest of the world, the U.S. paid little attention to how its dollar policies affected other countries, whether through the increasing issuance of dollar-denominated debt or through economic sanctions against adversaries like Iran and Russia, with Washington developing complex and enhanced economic sanctions and creating secondary sanctions. However, the book argues that “the weaponization of the dollar” or American financial sanctions could negatively affect the dollar’s strength and its global standing in the long run.

U.S. allies have sought ways to circumvent the “weaponization of the dollar” affecting global trade. During former President Barack Obama’s administration, Washington led an effort to slowly reintegrate Iran into the global financial system after decades of being ostracized through the nuclear agreement in 2015. However, the Trump administration withdrew from the agreement in 2018, while Europe was unwilling to do so. Thus, Europe sought to find a way to continue trading with Iran without violating American sanctions. The book posits that any attempt to de-dollarize or evade American sanctions will weaken these sanctions in the future.

In the context of the negative effects of “the weaponization of the dollar,” the book mentions the U.S. Treasury’s decision to impose sanctions on Russian businessman Oleg Deripaska, former CEO of Rusal, one of the world’s largest aluminum producers. The author believes that punishing an aluminum manufacturing company would render it a more scarce product, also exposing the metal market to disruption, not to mention that it did not succeed in shutting down the company. The author presumes that the Treasury did not invest sufficient time to analyze all the repercussions of imposing sanctions on an entity influential in global metals markets.

On the other hand, the sanctions did not stop the Russian-Ukrainian war, especially as they are porous and do not necessarily produce the expected impact by those imposing them. For instance, last year, a billion dollars’ worth of electronic chips arrived from Europe and the United States to Russia to support its war technology; thus, American sanctions failed to deter Moscow from continuing the war.

Is There an Alternative to the Dollar?

The author argues that America’s broad expansion in the indiscriminate use of sanctions will drive countries, entities, and international companies to seek alternative currencies to the dollar as a refuge from American sanctions, likely resulting in a decline of the dollar’s global dominance over trading and commerce sectors, and thus its geostrategic usefulness. Even if BRICS proposals and similar initiatives fail to provide a reliable alternative to the dollar, some believe the dollar’s decline through global foreign currency reserves and trade invoices symbolize a weakening of the institutions that initially enabled the dollar’s dominance and subsequently supported its global hegemony.

On the other side, U.S. Treasury officials assert that “the dollar remains the dominant currency, and there is no alternative to it.” For example, India has purchased large quantities of oil from Russia and paid for it with rupees, but Russia does not know what to do with all these rupees, which do not have the same convertibility as the dollar.

The author believes that the greatest threat to the dollar does not come from BRICS alternatives or even from Russia and China’s policies but stems from the American democracy’s predicaments. The United States needs self-critique and to bolster the rule of law, party cooperation, free and fair elections, and the independence of institutions, such as the Supreme Court, while avoiding the politicization of the Federal Reserve; this is what ultimately enhances the dollar’s global dominance.

The author concludes by asserting that the United States should realize that its global power is not a given. The dollar’s hegemony is a double-edged sword; it can provide the U.S. with unparalleled financial leverage, yet its strength contributes to the suffering of the manufacturing sector on one hand and fuels sentiments against the U.S. and its influence on the other. Reform and the reinforcement of hegemony must begin from within.

Source:

Saleha Mohsin. Paper Soldiers: How the Weaponization of the Dollar Changed the World Order. Portfolio. 2024.