‘Weaponisation’ to undermine dollar’s status as reserve currency

The 'weaponisation of the dollar by the US and allies against Russia in retaliation of its invasion of Ukraine has sparked anew a debate on the US currency’s future as a global reserve with most analysts predicting that such a martial approach could undermine the greenback’s dominance.

Analysts say using the world's top reserve currency as a financial weapon is likely to accelerate a move already initiated by many countries to diversify investments into alternative currencies.

For China, the world’s second largest economy, such exploitation of the dollar’s global dominance will force it to speed up measures to reduce its reliance on the dollar and lead to the creation of an alternate global financial payments system, monetary experts argue.

“The more the US uses it, the more other countries are going to diversify due to geopolitical reasons,” said Zongyuan Zoe Liu, a fellow for international political economy at the Council on Foreign Relations.

The dollar debasement is the ultimate outcome as the dollar is weaponised in the new era of sanctions, Bank of America analysts led by Michael Hartnett noted in a report released on Thursday.

In a sign that shift is already gaining pace, The Wall Street Journal said that Saudi Arabia was in talks to price some crude it sells to China in yuan.

China’s push to establish a digital yuan and create an alternate payments system is part of the plan. The massive Belt-and-Road Initiative will also aid China in its attempts to broaden international acceptance and usage of its currency. Back in 2020, given already rising geopolitical tensions, China and Russia agreed to ditch the dollar for bilateral trade settlements.

“Given the emergence of the China-Russia alliance, and, considering China’s continuing rise as an economic and military power, we cannot underestimate the future risk to the dollar’s global status. Strengthening US alliances with emerging powers (like India and Brazil) and establishing closer ties with the African continent will be essential for the West as we enter a new era of geopolitical competition,” argues Vivekanand Jayakumar, an associate professor of economics at the University of Tampa.

— issacjohn@khaleejtimes.com