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How a Weaponized Dollar Could Backfire

Oct 23, 2019 Jeffrey Frankel

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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Jeffrey Frankel

Writing for PS since 2000
159 Commentaries

Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

The Currency Manipulation Game
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The Currency Manipulation Game

Jeffrey Frankel says the recent depreciation of the renminbi was the result of planned American tariffs rather than Chinese policy.

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The Domestic Threat to US Leadership
Bloomberg/Getty Images

The Domestic Threat to US Leadership

Jeffrey Frankel warns that President Barack Obama's recent string of foreign-policy successes could be rolled back.

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Joe Ryan Oct 27, 2019

Prof. Frankel writes, "should the US carelessly relinquish leadership of the global multilateral order, the dollar might eventually lose its own long-standing primacy."

Perhaps he might have written, instead, "Should the U.S. lead a movement away from USD primacy and towards a multilateral payment standard, the U.S. might regain its leadership of the global multilateral order."
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Douglas Leyendecker Oct 27, 2019

Exactly what is going to replace the dollar? The Euro? That "country" isn't even a country and it's future is in obvious jeopardy. The Yuan? If you can't trust a country why would you trust their fiat currency? Cyrptocurrencies? Fools gold. As former Secretary of Commerce John Connally suggested, "the dollar is our currency but your problem". The dollar remains the only viable option until the fiat currency system evaporates and we start all over.
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j. von Hettlingen Oct 26, 2019

According to Jeffrey Frankel, when descriptions of exchange-rate policies have become increasingly “militaristic” it reeks of a currency war. He maintains Trump’s abuse of the US dollar’s hegemonic status as a weapon could threaten its dominance. Sadly, foreign policy under the current administration “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.”
Since Trump took office, he denigrates America’s long-term allies, seeing them as rivals and an existential threat to the US. He has been weaponising the dollar to preserve its global economic and geopolitical position. Seeing himself as a pugnacious currency warrior against foes – perceived and real –Trump uses the dollar’s global status as a tool of foreign policy.
The author says “the one major country to have violated this 2013 agreement is not China, but the US.” Trump - having no idea about macroeconomics - has repeatedly talked down the dollar’s value in order to reduce trade deficit, while putting pressure on the US Federal Reserve to lower interest rates with the explicit objective of depreciating the currency – a controversial move highly criticised by experts.
Since he unilaterally abandoned the 2015 nuclear deal that Iran signed with world powers, and imposed “maximum pressure” on Tehran to bend its leadership to his will, world powers like the EU, China and Russia have been seeking ways to salvage the deal and shake off the stranglehold the dollar has long held on global trade and finance. If other countries continue to do business with Iran in defiance of US sanctions, they could find themselves hit with secondary sanctions.
Trump’s unilateralist approach has unquestionably unleashed panic across the globe, prompting some analysts to ask whether, in the longer term, the US dollar’s supreme position in the global financial system could be shaken as other nations revolt against what they see as Trump’s arbitrary and aggressive use of America’s economic and financial power to get his way in foreign affairs.
While the US accounts for about 20 percent of the world’s economic output, more than half of all global currency reserves and trade is in dollars. This is the result of the 1944 Bretton Woods agreement, the effect of which was enhanced when the link between the dollar and gold ended in the 1971 Nixon shock, allowing America to control the supply of the currency.
In the midst of market volatility and chaos following the trade war between the US and China, gold has shot back into the limelight. The recent spike in gold prices to over US$1,500 per troy ounce – the highest since a peak of almost US$1,900 in 2011 – is partially a response to the heightened animosity between the US and China. But these tensions are far from the only reason why gold price has been driven up in recent year.
Since the 2008 global financial crisis, central banks worldwide have returned to buying physical gold. The first half of 2019 saw a flurry of activity as gold purchases made by central banks have rocketed to record levels.
Russia and China have continued to aggressively buy gold, with Russia remaining the largest buyer in the world, having reduced its US Treasury holdings. Russia, hit by Western sanctions following its annexation of Crimea in 2014, had shifted its reserves out of dollars in 2018 and is selling its oil in non-dollar currencies.
As China used to hold most of the US debt, it realised its vulnerability since the US dollar has been increasingly weaponised by the Trump administration. In order to reduce American economic leverage and minimise future exposure to tariffs and sanctions, Beijing has been gradually reducing its US debt holdings, allowing Japan to surpass China as the top holder of US debt.
This is just the beginning of the de-dollarisation process.
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Elizabeth Pula Oct 24, 2019

UN Secretary-General António Guterres warned that the global economic outlook is facing severe headwinds, and the international community must quickly act to "do everything possible" to prevent the world from "fracturing," mostly due to the US and China trade war.

UN Secretary-General Antonio Guterres NEEDS TO BE LISTENED TO!!!

https://www.zerohedge.com/economics/central-banks-are-out-ammo-un-head-demands-immediate-fiscal-stimulus-save-world-crisis

To further add another quote, and this one is from George Gilder- Wealth and Poverty,
Page 294, para 2.

“Closed systems of enterprise can sometimes succeed in manipulating markets or governments in making incremental advances of productivity, or in initiating the innovations ofothers. But these systems rarely generate new enterprises or substantial growth.”

Much of what Gilder has written is being misinterpreted by certain human beings for short-term personal gains, primarily by THEFT FROM OTHERS' work, and others' work efforts.

And a personal PS- Eric Basmajian of EPB Macro Research has some of the BEST MACRO analysis presently being projected around on the planet earth to help you understand just what UN Secretary-General Antonio Guterres is warning any reader about.

I can only interpret any charts and any comments such as Frankel's and others from my personal and quite limited view. However, I firmly believe that Gilder's comments about the real struggle for economic survival is really based in a balance of activities in the present that allow for the existence of a more positive, and not negative future. The real struggle is not a class struggle or political rhetorical struggle in the present. It is the struggle to allow any possibility and what kind of possibility for who, what, where, why, how, and when for any and what kind of future. And of course the most important answer is a future for who, what, where, why, how and when and for how long. Of course, the present never really knows anything about the future, the present can only suppose, based on the best paradigms that have been learned from the past for those that have survived into the present.
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Louis Woodhill Oct 23, 2019

A globalized economy needs a common currency. As the world currency, there is no alternative to the U.S. dollar and there never will be one.
- Michael James Oct 27, 2019
  
  " there is no alternative to the U.S. dollar and there never will be one."
  
  Of course there is. Keynes suggested the Bancor which was a virtual currency purely for the purposes of trade. It was rejected by the US at Bretton Woods, not because it wasn't viable but because it was viable and the US wanted to be the beneficiary of the dollar's exorbitant privilege.
  As the US dollar diminishes and the Yuan and others take a bigger slice, it will probably be the compromise.
  Here is the relevant bit from Wiki:
  
  Since the outbreak of the financial crisis in 2008 Keynes's proposal has been revived: In a speech delivered in March 2009 entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China called Keynes's bancor approach "farsighted" and proposed the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency as a response to the financial crisis of 2007–2010. He argued that a national currency was unsuitable as a global reserve currency because of the Triffin dilemma - the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency.[2][3]
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- Paul Friesen Oct 24, 2019
  
  You're dreaming. China is 3 times your size and industrializing fast. Get used to it.
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- Ariel Tejera Oct 24, 2019
  
  The dollar is the world currency also because of U.S. trade deficits that allow foreigners to keep them. There is an equilibrium. So, if the U.S. share of the world economy decreases bellow some point, then, who knows ?
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Petey Bee Oct 23, 2019

An alternative to dollarized SWIFT would help keep the dollar system honest too.

EU/Euro could pull this off fairly quickly (meets all the requirements already), but won't do it without a unified and assertive politics, the rise of which is easy to prevent.

China's OBOR will form a bloc but only for those on Uncle Sam's sh☆t list. This would limit its significance, except that US policy makers have a way of picking fights with energy producers (Iran, Venezuela, Russia), per reasoning I think is obsolete but remains ingrained in habit.
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Paul Friesen Oct 23, 2019

Americans need to start getting used to the fact that the days of their being able to dominate and dictate to the rest of the world are numbered. As countries industrialize, they converge in per capita GDP with previously industrialized countries. China is converging fast. And when its per capita GDP is comparable to that of the U.S., its total GDP will be perhaps 3 times the size of the U.S. That will end U.S. dominance, just as U.S. industrialization ended British dominance.

As the author says, Trump is helping this process along. Companies all over the world, but especially in China have been taught that it is unwise to depend on the U.S. for anything - as a source of supply for components, as a market for outputs, or for banking services. They will surely create or find alternatives that do not expose them to arbitrary harassment.
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Mirek Fatyga Oct 23, 2019

will, not could, is the word we are looking for here. And the part about the British Pound coming back ... come on.
- Jeffrey Frankel Oct 23, 2019
  
  I don't see pound sterling making a come-back. -- JF
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Eric Weis Oct 23, 2019

I wonder about the potential of Brexit to revive the POUND STERLING (LS) as an international currency. London remains an international financial center, on a par with New York, sharing the English language which has long served as the global language of commerce. So, yes, the Euro could eclipse the $ (note the lack of even a symbol for the Euro on modern computer keyboards). Or might the LS make a roaring comeback?
- Michael James Oct 27, 2019
  
  Alt (Option) + Shift + 2 = €
  
  Been on keyboards for decades (since at least 1999).
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Elizabeth Pula Oct 23, 2019

Interesting article, especially because of your focus on three keywords, and your focus on narrative support. P.S. my narrative tears into the "dollar" eventually.
RE:"More generally, US foreign policy under Trump continues to run counter to America’s traditional post-war objectives."

The present US foreign policy is practically non-existent, at least as any kind of valid policy to support any kind of defined national goals, internally or externally, or global objectives.

The narrative that is being disseminated from the executive branch of power is primarily personal reactive tweets, that may or may not be edited prior to the send button being hit on any device, by any human being to then be "fed" out as a tweet for public access reading. Aren't these tweets just reactive tweets to the probably daily, if not hourly summaries of probably precinct, county, state etc. cumulative personal political campaign surveys from strategically sourced data-base "word" filters, that can project political trends from the same word filters of tracked content that is "managed" by a few privately owned corporate entities, and investment funds? Think about that lengthy and quite wordy question for a bit.

I'd say that by now the person, who is even supposed to be generating the tweets, doesn't even have to be bothered, as the tweet content has probably been delegated to an algorithmic data text generator that can timely respond, and alter the focus of any message according to the trending results that have been summarized by the filtered surveys skimming the content that human beings have created as the original source data.

So, no wonder no foreign policy really exists. It doesn't need to. Until it does.

There are NO TRADITIONAL post-war objectives either. The only effective post-war objective has been to keep the money flowing to the industry that Eisenhower mentioned a long time ago. Think about that for a bit too.

Throw in the present corrupting support by certain unnamed family members that are cozying up to some other family members in the Middle East, and you get even more smoke for the smog machine to keep money flowing to that industry that Eisenhower mentioned a long time ago, with the added effect of how a lot more money going into certain pockets, rather than into any effective directions to establish any policies either domestic, or foreign to any benefit to a state called AMERICA, nor the federated organization labelled the United States of America, then what you get is a lousy depreciated dollar, with strategized inflation.

What is presently happening in the Executive branch is an overt attempt to establish a dictatorship and replace the operational organizational structure of the balance of power that established the federation of the United States governmental structure as an operational body. The seat of power is not in the identity of any particular human being, such as a bad puppet not dancing on a loose string, but in the POSITION of the executive branch as an operating focal point to balance the power of the other branches of the organization structure of the socially contracted form of the government as a group functioning dynamic of the Executive, Legislative, and Judicial similarly points-of-power. This governmental structure is balanced by the will of the people, with freedom of speech, being their rational voice to balance any devolution into chaos, anarchy and mob-rule. A few human beings are dealing with overly inflated egos to the absolute chartable extremes, rather than being stewards of positions of power for their nation to continue to survive as a nation.

The federation of states, with an organizational structure under a social contract, allows currencies to be used rather than bartered goods. Think about that nibble for a bit.

The present leadership has been carelessly relinquishing leadership from the left and right to the global multilateral order. Read that sentence a few times just to begin to recognize the meaning of the sentence.

It is not necessarily wrong. It is not necessarily bad. However, if it is not done with some orderly focus, then control mechanisms for the most part will only become more scooping up of dead bodies of 3 to 6years old human beings in US dumpsters. You may want to start investing more in the private equity funds that make their big money from human waste.

The present control mechanisms that are being utilized globally are not sourced with the correct principles to support growth fundamentals for specific nor macro economic trends.

What really needs to be examined is NOT that the dollar might eventually lose its own long-standing primacy, but what is the long-standing primacy of the US dollar principles? What are the most basic principles?

The present group of FB that wants to play switch-the-bait does not have a clue as to the significance of principled action.

If the leadership in Congress cannot evaluate the present financial discovery process that is creeping through Congress and reach positive conclusions for entrepreneurship, and local businesses, then no one will have to worry about the dollar anymore, or even any paper trails anywhere- especially if they can't reach any conclusion.
- Solo Woo Oct 24, 2019
  
  "What really needs to be examined is NOT that the dollar might eventually lose its own long-standing primacy, but what is the long-standing primacy of the US dollar principles? What are the most basic principles? " -- this statement nailed hard on the heads of "The present group of FB (whatever you mean)"!
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