- US economic sanctions have spawned something of a global backlash, in the form of the dedollarization movement.
- This was anticipated as early as 2019, by an expert who warned the weaponization of the dollar could have serious consequences for the global economic system.
- Longer-term effects could include a complete reversal of globalization and even a collapse of the WTO, according to the London School of Economics' Julius Sen.
Washington's penchant for wielding the dollar's global sway as an economic weapon has spooked countries from China and Brazil, fueling an unprecedented campaign to dethrone the greenback.
But the so-called dedollarization drive doesn't come as a surprise to all – some experts have been warning of this for years.
In a 2019 report by the London School of Economics, political economy expert Julius Sen explored the way the Donald Trump administration weaponized the dollar by scrapping the Iran nuclear agreement signed in 2015. At the time, the US slapped a number of sanctions on Tehran for failing to curb its nuclear program, including restrictions on the country's use of the greenback.
"The term 'weaponization' is also apt as it explains how a relatively neutral but essential facility – the dollar and its accompanying payment system – have been turned into a powerful weapon by one UN member state against another without appropriate sanctions in place. In addition to weaponization, it also represents an aggressive form of extraterritoriality which has perhaps not been seen on this scale in the past," Sen said in the report.
Sen suggested, clairvoyantly, that America's use of its currency as an instrument of economic offensive could prompt other countries to "find their own coping mechanisms" – such as a diversification of reserves away from the dollar, a shift away from greenback-based debt, and a reintroduction of capital and currency controls.
Back in 2023, dedollarization is a thing
Fast forward to 2023, and some of the recent rumblings across the global currency and monetary landscape are strikingly in line with Sen's prognostications. By now, the world has seen more instances of the dollar's weaponization – most recently against Russia, in response to its war on Ukraine.
From barring Russia's access to $600 billion in reserves to booting the nation out of the SWIFT international banking system, the US has gone more aggressive than ever with its dollar offensive.
But a backlash is beginning to take shape – countries from China to India and Brazil are pushing for alternatives to the dollar for trade and investment. BRICS nations talk of a gold-backed currency. Even French President Emmanuel Macron has called for Europe to reduce its dependence on the "extraterritoriality of the US dollar."
Collectively, these efforts have come to be known as dedollarization.
Household names like Tesla CEO Elon Musk have warned against weaponizing the dollar as the dedollarization movement gathers momentum, saying: "If you weaponize currency enough times, other countries will stop using it."
'Complete reversal' of global integration
Sen's 2019 analysis didn't stop at anticipating dedollarization – he also made some grim projections on the longer-term consequences of a weaponized dollar and its repercussions.
All that could come at a huge cost to the global economy – and drive a "complete reversal of global economic integration," he wrote.
"If the feeling is that these countries will now have to fend for themselves and find their own coping mechanisms, then the global system could quickly fragment as countries move to protect themselves from a more general breakdown in a global system that has provided the institutional and operational architecture for global trade, investment, finance and payments on which everyone substantially depends," he added.
Much ado about nothing?
However, optimists including Nobel laureate Paul Krugman said fears about countries eroding the dollar's dominance were "much ado about nothing". The greenback's status as the world's reserve currency faces no real threat for the foreseeable future, according to German financial-services giant Allianz.
The dollar's share of global reserves could slowly decline, but no alternatives exist that could completely displace the US currency, Treasury Secretary Janet Yellen said last month.
Back in 2019, Sen also anticipated some of the tectonic shifts in the global geopolitical landscape that may have been set in motion now. Russia's war on Ukraine and its political fallout has seen Moscow's relations with the West deteriorate further, and President Putin step up efforts to boost ties with Asian nations such as China and India.
'The WTO system could crumble'
"As countries come to terms with a new reality, political relationships will be redefined. Strategic friendships will be sought in order to mitigate some of the risks, particularly for economies dependent on food or energy," Sen wrote.
"This in turn will create a new pattern of interdependencies that will operate largely outside current global frameworks and will possibly develop rules, practices and procedures that are inconsistent with other international obligations. The WTO system, for example, would crumble completely in the face of this happening," he added.
Read more: Dedollarization of global FX reserves? Not so fast, Allianz says