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How a Weaponized Dollar Could Backfire

United States foreign policy under President Donald Trump continues to run counter to America’s traditional post-war objectives. Should the US carelessly relinquish leadership of the global multilateral order, the dollar might eventually lose its own long-standing primacy.

CAMBRIDGE – The language of international monetary policy has turned militaristic. The phrase “currency war” has now been popular for a decade, and the United States government’s more recent “weaponization” of the dollar is generating controversy. But ironically, a martial approach could end up threatening the US currency’s global dominance.

This is a good time to gauge the relative strengths of the dollar and rival international currencies (meaning currencies that are used outside their home countries). In September, the Bank for International Settlements released its triennial survey of turnover in global foreign-exchange markets. The International Monetary Fund’s statistics on central-bank holdings of foreign-exchange reserves have become much more reliable since China began reporting its holdings. And the SWIFT payments system issues monthly data on the use of major currencies in international transactions.

The bottom line is that the US dollar remains in first place by a wide margin, followed by the euro, the yen, and the pound sterling. Some 47% of global payments currently are in dollars, compared to 31% in euros. Furthermore, 88% of foreign-exchange trading involves the dollar, almost three times the euro’s share (32%). And central banks hold 62% of their reserves in dollars, compared to just 20% in euros. The dollar also dominates on other measures of currency use in trade and finance.

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