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The Lowdown Hub

The dawn of financial warfareIf the dollar’s standing is unassailable, the temptation to weaponise

© Bloomberg

The FT this week ran a brace of big reads on the sanctions slapped on Russia, how they happened and what the longer-term impact will be. It’s an important subject, and both pieces are worth reading at leisure. (Editor: that means after you’ve finished with this one.)

However, FT Alphaville had some follow-up thoughts on the subject, after having spoken to many experts in the field (two current and one former FT Alphavillain were involved). Our biggest takeaway? People seem very relaxed about threats to the dollar.

This might, in time, prove to have been overly sanguine, but we broadly share that assessment. China is the main contender, but until Beijing opens its capital account fully it cannot be a realistic challenger. And even when it does, who will the world realistically trust the most, the US or China?

Even countries that regularly clash with Washington will not feel much safer with the renminbi, given that China has shown even more willingness to economically sanction countries that don’t toe the line on issues like Taiwan. For example, India might not like the dollar’s hegemony, but that it would plough meaningful amounts of its foreign reserves into the renminbi seems preposterous, even if China allowed it to.

The reality is there are many facets that make, support (and break) reserve currency status, and established reserve currencies only fall over a long period of time. As fellow FT Alphavillain Claire Jones wrote Thursday, sterling’s top dog status lasted well into the 1950s, decades after the UK had become a middling power.

Like a social network, the advantages of the incumbents are huge. Countries can try to mitigate their vulnerabilities to financial sanctions from Washington, but they cannot eliminate them (especially if Europe and other allies like Japan join in, as they have in the case of Russia). It’s telling that even Barry Eichengreen, the daddy of dollar historians, is more chilled about the greenback dominance than he’s been in the past.

Despite Eichengreen publishing a wildly timely paper on the “stealth erosion” of the dollar’s dominance in March, he admitted that he had been surprised by the resiliency of the greenback’s role in the global financial system, with most of its market share losses going to smaller western currencies like the Canadian and Australian dollars, rather than the renminbi.