Sanctions reach won't disrupt the dollar's reserve currency status

Summary

In recent times, the U.S. dollar's status as the global reserve currency has been questioned, more so now that the reach of U.S. sanctions capabilities has been expanded to seize foreign government dollar assets. But despite the risk of having assets confiscated, in addition to recent efforts to diversify from the greenback, we continue to believe the U.S. dollar will remain the global reserve currency for the foreseeable future. Sanctions capabilities could also have a significant impact on China as official sector assets seem to have material exposure to the U.S. dollar and Western financial markets more broadly. U.S.-China geopolitical tensions, theoretically, should prompt China to make a concerted effort to move away from dollar and other advanced economy assets; however, China will face challenges in shifting away from the greenback.

U.S. Dollar reserve status is safe despite sanctions reach

Over the past few years, the status of the U.S. dollar as the global reserve currency has come into question at times. Developments such as Brazil and China announcing clearing arrangements in each other's currencies, energy exporting Middle East nations willing to accept renminbi as payment, as well as a possible BRICS nation common currency prompted suggestions that the dollar's downfall was inevitable. In response to those suggestions, we published our perspective, highlighting that we do not believe the U.S. dollar would lose its reserve status at any point over the foreseeable future, and that we were not concerned about recent attempts to pivot away from the dollar. In the case of China and Brazil settling in each other's currencies, the China-Brazil trade relationship is worth only ~0.40% of total global trade, far from material enough to result in noticeable de-dollarization. We also had doubts that Middle East energy exporters, most of whom operate under a fixed exchange rate regime to the U.S. dollar, would be willing to potentially put currency pegs at risk by generating less dollar revenues. And a BRICS common currency, in our view, is unlikely to gather momentum. BRICS countries have intra-bloc competing objectives—both geopolitical (China-India, Saudi Arabia-Iran) and economic (China-India, Brazil-South Africa)—that we believe would ultimately limit policymaking options for most nations in the bloc. Not to mention, we have been skeptical that BRICS nations would want to expose themselves to potential secondary sanctions from perceived or actual doing business with sanctioned Russian government and corporate entities.

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