Weaponization of the US Dollar

Extracted Attributes

• Strategic Goal

  Geopolitical leverage and economic statecraft as an alternative to armed conflict

• Economic Impact

  Erosion of the dollar's 'safe haven' status and increased search for alternative reserve currencies

• Primary Mechanism

  Sanctions and seizure of foreign exchange reserves

• Key Infrastructure

  SWIFT network and U.S. Treasury market

• Geopolitical Consequence

  Acceleration of de-dollarization and BRICS expansion

Timeline

• Collapse of the fixed exchange rate system, though the dollar maintains its global reserve function. (Source: LSE-IDEAS-Weaponisation-Dollar.pdf)

  1971-01-01

• The United States begins a marked increase in the frequency and intensity of economic sanctions. (Source: Brookings - The changing role of the US dollar)

  2010-01-01

• China begins reducing its dollar-denominated security holdings from 50% of its reserves. (Source: Chatham House - US dollar dominance)

  2018-01-01

• LSE identifies the potential for dollar weaponization to provoke a general geopolitical showdown. (Source: LSE-IDEAS-Weaponisation-Dollar.pdf)

  2019-08-01

• Freezing of Russian foreign exchange reserves, marking the most aggressive weaponization of the dollar to date. (Source: Chatham House - US dollar dominance)

  2022-02-01

• BRICS expansion includes Saudi Arabia, UAE, Argentina, Egypt, Ethiopia, and Iran to challenge Western economic dominance. (Source: All-In Podcast Episode 144)

  2023-08-01

United States two-dollar bill

The United States two-dollar bill (US$2) is a current denomination of United States currency. A portrait of Thomas Jefferson, the third president of the United States (1801–1809), is featured on the obverse of the note. The reverse features an engraving of John Trumbull's painting Declaration of Independence (c. 1818). Throughout the $2 bill's pre-1929 life as a large-sized note, it was issued as a United States Note, a National Bank Note, a Silver Certificate, a Treasury or "Coin" Note, and a Federal Reserve Bank Note. In 1928, when U.S. currency was redesigned and reduced to its current size, the $2 bill was issued only as a United States Note. Production continued until 1966 (1967), when United States Notes were phased out; the $2 denomination was discontinued until 1976, when it was reissued as a Federal Reserve Note, with a new reverse design. The obverse design of the $2 bill is the oldest of all current US currency. Because of businesses' banking policies that do not rely on $2 bills, fewer are produced and therefore they circulate much less than other denominations of U.S. currency. This scarcity in circulation has contributed to low public awareness that the bill is still being printed and has inspired urban legends and misinformation about $2 bills and has occasionally caused difficulties for persons trying to spend them. Some merchants are unfamiliar with $2 bills and question their validity or authenticity. In spite of its relatively low production figures, the apparent scarcity of the $2 bill in daily commerce also indicates that significant numbers of the notes are removed from circulation and collected by many people as $2 bills are scarcer and more valuable than common bills.

Web Search Results

• [PDF] The Weaponisation of the Dollar - LSE

  Update | August 2019 meaning the US could run trade and fiscal deficits virtually without limit, but of course with consequences. So the potential to weaponise the dollar was often recognised, but the US very rarely moved decisively in that direction. Efforts to punish Cuba, isolate the Soviet Union and China, and starve communist regimes of funds were an integral part of Cold War strategy, but were designed as an alternative to armed conflict. Political and military relations were then managed to try and avoid war, in anticipation of ultimate economic collapse, which happened in the Soviet sphere, but not in China. The present strategy of weaponisation seems to be designed to provoke a war. Although the fixed exchange rate system collapsed in 1971, the dollar continued to function as the [...] 5 Sender, H., in the Financial Times, 17th June 2019, “The Weaponisation of the dollar risk rebounding on the US” reflects on the longer term effects of dollar weaponisation and the harm it could do to the US domestic economy as sanction measures actually play out. 6 Smith, J., “On China, Trump needs Europe”, in The New York Times (International Edition), p.7, June 13th, 2019. 7 The Triffin Dilemma is often cited in this context, though JM Keynes foresaw much the same in broader terms. See Lebowitz, M., “Triffin Warned Us”, in Realinvestment Advice.com, April 18th 2019, for more depth and detail. 8 Maharrey, M., SWIFT and the Weaponization of the dollar, from the Foundation for Economic Education (FEE), 6th October 2018. [...] Policy options for developing countries Although the weaponisation of the dollar is the culmination of a fairly long process, most countries seem to assume that it is an aberration and things will return to normal over time, especially given the inconsistency and unpredictability of US policy moves. But increasing trade friction between the US and China (whether actual 14 LSE IDEAS Strategic Update | August 2019 or rhetorical), tensions with Iran, Russia, North Korea, Cuba and Venezuela, and the simultaneous weaponisation of other policy instruments—investment rules, technology controls, etc.—tend to confirm that the US is arming itself for some sort of general showdown. Add in the current ambiguity in US relations with the EU, and the implications become more serious for other countries

• US dollar dominance is both a cause and a consequence of US power

  ### BRICS+ economies unite to target the dollar Freezing Russian foreign exchange reserves in February 2022 is certainly the most aggressive weaponization of the dollar to date, following similar (but much smaller) assaults on the central banks of Libya, Iran, Venezuela and Afghanistan. The theory is that the dollar’s use as a foreign policy tool and over-use of sanctions like these could make more countries worry about losing access to their dollars, encouraging a tilt away from the dollar to other alternatives. [...] And even China, a country that has many reasons to worry about dollar weaponization, has not wholeheartedly abandoned it. In 2018, China’s total holdings of dollar-denominated securities amounted to some 50 per cent of its foreign exchange reserves. While this has now to just below 40 per cent, that is still $1.4 trillion of US assets in total – not exactly small change. While dollar dominance is uncomfortable for many countries, US military power, the structure of its alliances and the slow pace at which the distribution of currency power changes will preserve its status as the top currency for the foreseeable future. [...] Persistent external deficits in recent decades have left the US with substantial foreign liabilities. In the late 1980s the US was still a net creditor to the rest of the world. Now, though, what it owes foreign lenders outstrips what it is owed by foreign debtors by approximately $20 trillion, or around 70 per cent of US GDP. If there are so many dollars floating around that their worth becomes questionable, it could have negative consequences. But even this might be a greater risk to the level of the dollar – its exchange rate – rather than its status. Another risk for the dollar might be its increasingly frequent use as a weapon the US deploys against countries it wants to punish. The World Today Related work ### BRICS+ economies unite to target the dollar

• What's Behind the U.S. Dollar's Dominance and Why it ...

  Despite the numerous advantages of holding dollar reserves via U.S. Treasurys, there are also risks for other countries, some of which have grown recently. These include: Cross-border impacts of the Federal Reserve’s monetary policies (capital outflows, exchange rate fluctuations, etc.), particularly during monetary tightening cycles Potential “weaponization” of the U.S. dollar through the usage of sanctions—and more recently tariffs—against other countries, including allies The U.S.’s declining fiscal health and frequent debt limit confrontations, which undermine the “safe haven” status of the U.S. dollar and Treasurys For decades, despite these concerns, countries had few alternatives to dollar reserves. That may be changing now, as:

• The U.S. Dollar, Emerging Technology and Geopolitical Risk ... - Mitre

  What’s the issue? The U.S. dollar has been the cornerstone of the global financial system for over 60 years. However, the rapid development and adoption of digital currencies and new payment systems are challenging this status quo. Stablecoins, cryptocurrencies, central bank digital currencies, and novel payment systems are rising in popularity as alternatives to the incumbent payment system because of weak banking infrastructure in some countries and the “weaponization of the dollar.” This trend could undermine U.S. national security, including by weaking the effectiveness of some U.S. tools for economic statecraft.

• The changing role of the US dollar

  Sanctions. Since 2010, the U.S. has increased its use of sanctions. Critics of U.S. sanctions contend that the U.S. has “weaponized the dollar,” especially when the U.S. imposes sanctions without the support of its allies and partners. In China and China-aligned countries like Russia, leaders aspire to bank and trade in their own currencies away from the watchful eyes of Uncle Sam. The Chinese government, for instance, has promoted the renminbi as an alternative to the dollar in trade and development finance as a part of its Belt and Road Initiative. Leaders of the BRICS alliance—Brazil, Russia, India, China, and South Africa—have explored developing a common currency, though most experts give that little chance of success. If the United States is capricious with sanctions, acts [...] Debt and dysfunction. U.S. politics are contentious and polarized. Fiscal policy is undisciplined, with the debt-to-GDP ratio rising to new, previously unheard-of heights. Ratings agencies have downgraded U.S. long-term credit. Bickering over appropriations, Congress has shut the government down several times. Further political instability could erode investor confidence in the dollar. [...] The benefits of a dominant dollar have been called an “exorbitant privilege” for the U.S. It lowers the cost of borrowing and debt service for the U.S. government and American consumers; it also means that the U.S. can borrow more than it would be able to otherwise. For consumers, a dominant dollar, working through the exchange rate, reduces the cost of imports, making it easier to purchase cheap goods from abroad. The dollar’s global reserve status reduces the chance that the U.S. will face a currency crisis, in which a sudden devaluation of the dollar could halt imports, deteriorate the terms of trade, and cause a financial crisis. (This also works in reverse: Other countries become more susceptible to the dollar and U.S. financial conditions.) In addition, the ubiquity of the dollar