it is the possibility that the US and perhaps other Western governments seek to use the dollar as a weapon to punish or stop other governments from doing things they object to.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy, said it seems that there are a number of reasons why countries might want to wean themselves off the dollar. First, it is the possibility that the US and perhaps other Western governments seek to use the dollar as a weapon to punish or stop other governments from doing things they object to. But there are other reasons as well. Second, excessive dollarisation makes countries dependent on US monetary policy and the level of the dollar. In fact, it is argued that all countries are beholden to Fed policy and the movements of the dollar given the domination of the greenback in areas such as trade invoicing, debt denomination, FX trading and more. And there’s perhaps a third reason as well which is that the US has abused this power by printing ever greater amounts of cash that are only now starting to show up in soaring inflation.

However, there’s clearly problems with all these lines of reasoning. First, as Russia has found out (and Turkey as well) it is hard to de-dollarise sufficiently to obviate all pressure points once the US decides to impose sanctions (in the case of Russia), or the market decides it does not like domestic policy (Turkey). Insulation from the US-generated global financial cycle might be desirable but can probably only be achieved through capital controls and lots of reserves – as China has done. But the problem in China’s case is that the very capital controls that help insulate the currency and the financial system from the vagaries of Fed policy and dollar volatility, are the same ones that prevent the renminbi becoming a serious rival to the dollar. This brings us on to the third problem with de-dollarisation, which is finding alternatives.

Dollar holders around the world might be concerned that the US has abused its monetary hegemony to unleash a huge increase in the supply of dollars, but all major central banks have done the same. Perhaps they have not done it to the same extent, but all are ‘guilty’ of believing that the money supply can increase ad nauseum without any consequences for prices.

This, in turn brings us onto the idea of alternative monies, such as commodities like gold, or crypto currencies, whose supply is relatively inelastic. The latter has received much attention in the wake of the Ukraine conflict as a possible sanction-busting asset. But herein lies the problem, for while crypto currencies may allow sanctioned persons to hide their cash away, this merely serves to bolster the case of most central banks and governments who argue that crypto currencies are no more than an avenue to move “illegal” funds. And that, in turn, gives them even more justification to try to crack down on crypto currencies.

Another point is that the war in Ukraine has shown again that crypto currencies are no safety hedge. Gold, for one, has performed much better and presumably crypto currencies would have fared far worse were it not for the possibility of this sanctions effect. Holding their own against the dollar through this crisis hardly counts a ringing endorsement of crypto currencies in Mr. Steve Barrow’s view. But despite these barriers to the establishment of alternatives to the dollar, Mr. Steve Barrow thinks that some degree of dollarisation is likely. The key question now is whether the war in Ukraine will cause polarisation with Russia/China and possibly others, such as India, on one side, and much of the West on the other. As for the value of the dollar over the long haul, it is one of modest weakness but not an outright collapse caused by some sort of rapid and wholesale ditching of the greenback.