The shock-and-awe financial sanctions on Russia have rekindled an old trope: that the weaponization of the dollar will end its role as the global reserve currency. Why would foreign countries use dollars, the argument goes, if the dollar can be turned against them? Why wouldn’t China, soon to be the world’s largest economy, build the renminbi into a rival reserve currency? And if not China, what about crypto?
This dollar defeatism is vastly overblown. Russia, China and other U.S. adversaries would love to escape the financial hegemony of Uncle Sam. But they have been trying for years and have little to show for it.
China has railed against the dollar since 2008, when its vast portfolio of U.S. bonds came close to imploding during the great financial crisis. Chinese President Hu Jintao called for “a new international financial order,” and Beijing began to push the use of the renminbi in international commerce and as a central bank reserve asset. Soon renminbi-denominated trade began expanding fast, albeit from a low base. Credible economists predicted the renminbi might become the premier reserve currency within a decade.
In the following years, countries at risk of being sanctioned by the United States redoubled their efforts to escape the dollar. Russia was the most eager. Its central bank moved the bulk of its foreign-exchange reserves out of dollars and into other stores of value. Its sovereign wealth fund promised to dump all dollar assets. It built a financial messaging system and connected it to Iran’s, countering a Western move to eject Iran from SWIFT, the dominant platform for instructing global transfers. Russia also worked with China to cut the use of the dollar in bilateral trade. In 2020, the Bank of Russia published a paper on the digital ruble, which would circumvent traditional banks and reduce Russia’s exposure to sanctions.
The results were modest, as Russia’s plight today shows. Western financial sanctions have hammered its economy, Russians have found it difficult to make foreign payments, and the crypto escape hatch has proved useless.
What’s more, a careful look at the status of the dollar confirms that it is not really at risk. Five or 10 years from now, dollar-based sanctions are likely to be as powerful as ever, including in a crisis where the target is China.
Since 2008, the dollar’s share in the foreign-exchange reserves held by central banks has declined only marginally, from around 65 percent to 60 percent. Moreover, the three next most popular reserve currencies are issued by the European Union (21 percent), Japan (6 percent) and Britain (5 percent). Future U.S. financial sanctions on China would almost certainly command the backing of these regions, partly because they are geopolitical allies and partly because European and Japanese banks live in terror of exclusion from U.S. financial markets.
What share of global foreign-exchange reserves are held in renminbi? The answer is 2 percent. The ruble and crypto languish below 1 percent.
Central banks like to use dollars for the same reasons that companies and individuals do. They hold dollars knowing that others will gladly accept them, just as many learn English because others speak it. Around the world, almost three-fifths of private foreign-currency bank deposits are held in dollars. A similar share of foreign-currency corporate borrowing is done in dollars. Neither measure shows much sign of decline. The Federal Reserve estimates that foreigners hoard about half the outstanding stock of dollar bank notes.
China bulls cite the proliferation of renminbi swap lines, or agreements allowing China-friendly central banks to call on renminbi loans in a crisis. A 2020 tally counted fully 35 such deals, more than the Federal Reserve maintains with foreign counterparts. But these renminbi swap lines are mostly symbolic. Central banks in small economies have been bullied into signing on, but they have no practical use for Chinese lending. In a crisis, they want dollars because their domestic banks do business in dollars. A standing credit line in renminbi is the financial equivalent of fluency in Esperanto.
Meanwhile, the Fed might offer dollar swap lines to a shorter list of countries, but there is nothing symbolic about them. During the great financial crisis, the Fed lent foreign counterparts $585 billion via these facilities. During the pandemic lockdown, it pumped out another $450 billion. Indeed, the popularity of dollar swap lines outweighs all the anecdotal chatter about China’s alleged financial rise. The dollar is more entrenched in the advanced economies than before 2008 because major central banks know the Fed will backstop the dollar-denominated parts of their financial systems.
Of course, the dollar’s reserve-currency status is not a divine right, and the Fed should step up its determination to fight inflation. But currency dominance is a sticky kind of power. For now, there is no reason to expect the United States to lose it.