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Geopolitics and the U.S. Dollar's Future as a Reserve Currency

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Abstract

I survey the role of geopolitics and sanctions risk in shaping the U.S. dollar's status as the primary currency used for international reserves. Without changes in the economic incentives for holding FX reserves in U.S. dollar assets, an increased threat of sanctions is unlikely to drastically reduce the dollar share of FX reserves. Currently, around three-quarters of foreign government holdings of safe U.S. assets are by countries with some military tie to the U.S. Even a reduced reliance on the U.S. dollar for trade invoicing and debt denomination by a large bloc of countries less geopolitically aligned with the U.S. would be unlikely to end U.S. dollar dominance.

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  • Colin Weiss, 2022. "Geopolitics and the U.S. Dollar's Future as a Reserve Currency," International Finance Discussion Papers 1359, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1359
    DOI: 10.17016/IFDP.2022.1359
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    Cited by:

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    2. Paweł Kowalewski & Dominik Skopiec, 2023. "Wzrost znaczenia złota w rezerwach dewizowych banków centralnych gospodarek wschodzących," Bank i Kredyt, Narodowy Bank Polski, vol. 54(3), pages 259-284.

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    More about this item

    Keywords

    Foreign Exchange Reserves; Sanctions; Security Alliances;
    All these keywords.

    JEL classification:

    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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