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Talk of de-dollarization has been gaining momentum among China, India, Brazil, Russia and South Africa in the wake of significant US led sanctions on Russia. Former US President and candidate Donald Trump has said the currency is under attack — and that any country that shuns it would face new tariffs on imports if he is elected.
On today’s Big Take Asia Podcast, host K. Oanh Ha talks to Bloomberg’s Saleha Mohsin about the unique role the dollar plays in the world economy — and what, if anything, could replace it.
Further listening: Odd Lots Podcast – How the US Dollar Became an International Weapon of War
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Here is a lightly edited transcript of the conversation:
K. Oanh Ha: Former President Donald Trump says the the US dollar is under attack.
Donald Trump: And we will keep the US dollar as the world's reserve currency, and it is currently under major siege. Many countries are leaving the dollar.
Ha: Since this spring, Trump has been expressing concern over the idea that other countries may want to move away from the dollar and he’s announced plans to try to keep that from happening. This is from a rally he held in Wisconsin this month.
Trump: They are not going to leave the dollar with me. I'll say you leave the dollar. You're not doing business with the United States because we're gonna put 100 percent tariff on your goods. Sir, we would like very much to get back to the dollar immediately. Thank you very much. It's so easy.
Saleha Mohsin: Trump, he pioneered new ways of using tariffs as a weapon of statecraft during his first presidency.
Ha: Saleha Mohsin is Bloomberg’s senior Washington correspondent and host of our Big Take DC podcast.
Mohsin: And he is already promising to go full bore next time, even deploy this giant tariff to protect apparently the US dollar.
Ha: Welcome to the Big Take Asia from Bloomberg News. I’m Oanh Ha. Every week, we take you inside some of the world's biggest and most powerful economies, and the markets, tycoons and businesses that drive this ever-shifting region. Today on the show: could the US dollar really lose its special status as the world’s reserve currency? And could the Chinese yuan replace it?
Ha: Saleha you have this new book out, all about the dollar – Paper Soldiers: How the Weaponization of the Dollar Changed the World Order – remind us how the dollar became the world's reserve currency in the first place?
Mohsin: So the owner of the world's reserve asset is always the world's largest economy. So before the US, it was Great Britain. And in the 1880s, the US outstripped Great Britain in terms of sheer economic size. But it didn't happen so quickly. It was 1944 after two world wars, when the economic policymakers of 44 allied nations gathered together for what later became the Bretton Woods Agreement. And they all decided that the best way to avoid another world war would be to create an economic brotherhood where the world economy is knitted close together around shared economic goals.
And they decided at that meeting that the US dollar, because of the US's economic size and also because of the US's very good fiscal trajectory at the time, that the US dollar should be the anchor currency for the global financial system. And two other important things happened – the World Bank was created and the International Monetary Fund were created. And all of that put together made the US and its dollar become the world's reserve asset.
Ha: And of course, the dollar’s maintained its strength.
Mohsin: It has. The dollar is still strong. Now, there are two definitions of a strong dollar. There's strength in terms of foreign exchange rate, how it compares to another currency, the yen, the yuan, the euro. The second definition of a strong dollar is its sheer dominance. The whole global financial system is underpinned by the dollar. That gives the dollar a lot of strength and power and that is another definition to a strong dollar.
Ha: And how is it or actually why is it that other countries are incentivized to use dollars?
Mohsin: There's a couple of reasons. One, it's a safe investment. You will always get a return on that investment. You can park your cash, a foreign central bank, a foreign multinational company, a foreign individual can buy US government debt or have any of their asset in American stocks, anything that is denominated in dollars coming out of the US, you are going to get a return on your investment because the US has a lot of economic innovation that is driven by its very huge fiscal deficit. It is also the owner of the world's most powerful military, which is also driven by our huge fiscal deficits.
Ha: But now we have Donald Trump out there basically saying the dollar is in danger of losing its special status and he’s saying that other countries are actually leaving the dollar – why is he saying that now? I mean are other countries actually thinking about trading less with the dollar?
Mohsin: He has since March, been publicly showing that he has paid attention to the de-dollarization discussion, and, and actions that have launched since the US-led economic sanctions on Russia. It was really the economic sanctions package in February 2022 when they invaded Ukraine. That was a massive package. And what it did was heavily curtail Russia's access to the dollar, including its central bank. It really put allies, even, and then a lot of adversaries on guard that the US is willing to go quite far to fight a proxy war with another country in terms of weaponizing the dollar. And so you see the BRICS plus economies, that's Brazil, Russia, India, China, South Africa, and it's a growing club, of economies coming together saying, let's put our heads together and find a way to trade less with the dollar and have our own shared currency so that we're less beholden to US economic sanctions in case we run afoul of whoever the sitting president might be.
Ha: Now Trump has said he’ll answer those concerns about trading less with the dollar with some really big sweeping new tariffs – he’s said if he wins a second term he’ll put in place a 10% across-the-board tariff and on goods imported from China, it’s going to go as high as 60%. That sounds like a real ramp up, certainly from his first term as president. What do you make of that?
Mohsin: Yeah. You know, he's noticed the economic sanctions fatigue that is out there. He talks about how, you need to be, judicious in use of economic sanctions and maybe tariffs is the way to go, because if you're using tariffs on the surface of it, it looks like you are leveraging the US consumer market rather than leveraging the strength of the dollar to sort of carry out your economic policy goals.
Ha: Isn't Trump himself responsible for some countries looking to de-dollarize with his threat of tariffs and sanctions?
Mohsin: Trump is not the only president who bears responsibility. I would say every president since 9/11 has used economic sanctions to achieve foreign policy goals. And If you look at a chart of the use of economic sanctions, the line just goes straight up. And they went up a lot under Obama as well. They went up even more under Trump and then even more under Biden.
Ha: After the break, how the US and China have tussled over allegations of currency manipulation in the past. And could the Chinese yuan replace the US dollar as the world’s reserve currency?
Ha: We’ve been talking about former President Donald Trump and concerns that the US dollar could be replaced as the world’s reserve currency. And when it comes to the dollar and global trade, Trump’s also accused other countries of currency manipulation - and one country he’s pointed the finger at repeatedly is China.
Trump: But that’s happening and it’s happening even worse with China. They manipulate their currency better than any country in the history of the world in history. History.
Trump: And we are now working on a new trade deal with China but it must include real structural change to end unfair trade practices
Trump: Not only has China declined to adopt promised reforms it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation
Ha: And besides China, there are other Asian countries that the US Treasury Department says it's monitoring for currency practices – places like Malaysia, Singapore, Taiwan, Vietnam, and Japan was added to the list this summer. What is the US’s concern overall about what could happen with these other currencies?
Mohsin: The general concern is just that countries will meddle with the terms of trade with the natural laws of supply and demand and keep down the value of their currencies against the dollar in order to capitalize on the US consumer market, and that is not good for American manufacturers and companies and blue collar workers. In the mid 2000s and around the global financial crisis, there allegedly was a case to be made to charge China with actual currency manipulation. But the US decided not to do it because they wanted China's cooperation, and they were trying to sort of use backdoor channels and talks to slowly wean China off that habit.
Ha: And of course that relationship between the US and China has been a symbiotic one, right? Which you also talk in the book as well. I mean, how does that work through currency?
Mohsin: Yeah, and it's a chapter that I call a turbulent marriage because the US and China, they need each other. They are deeply entrenched with each other still, but they're at odds with each other. Now, the example that I can give is that in the aftermath of the global financial crisis in 2008, you know, it was an American-made crisis that spilled into the rest of the world. Everyone suffered. And the Chinese had a humongous holding of assets in US dollars, whether it was shares or ownership stocks in Fannie and Freddie or in US treasuries or US government bonds.
So if treasuries and the US economy was not doing well, it was bad for China because of their investments, and so China couldn't say, Okay, we're pulling out of the US economy because as they would pull out of this massive stake, you know, the first 10 percent maybe you'd win. And then the next 90 percent, prices would just plummet and you would take a loss, right? And the US also realized that we need to keep in close contact with China because we need their support. We don't want them to pull out. And that relationship, just that one tiny example, it tells you how deeply integrated the two countries are.
Ha: Mmm. We've talked a lot about Trump and his plans to try to protect the US economy and its status as a world's reserve currency. What do we know about what his opponent Kamala Harris has said or has in mind to, you know, around the dollar?
Mohsin: We don't know anything. We have not heard. There is an absolute paucity of policy when it comes to Harris's campaign right now. We don't know much about her foreign policy or her sort of international economic diplomacy and plans. Part of that has to do with the fact that she launched her campaign very late. Part of it has to do with the fact that she could rely on the Biden administration and lean on some of those policies.
Ha: Okay so we’ve talked a lot about concerns that the dollar could be replaced as the world’s reserve currency – but based on your reporting – how likely is it that this could actually happen?
Mohsin: One thing to point out is that the tide is turning, but only in terms of rhetoric. No one has abandoned the dollar. There is slightly less trade in the dollar compared to before, but it will be very hard to actually supplant the dollar. There's three main reasons for that. It's because the dollar is big, it's stable, and it's entrenched. So the dollar rules because the US economy is the biggest. It is almost biggest as numbers two, three, and four on that list – China, Japan, and Germany, combined. Banknotes have the words, “in God we trust”, printed on them, but it's the strength of American institutions that underpin investors faith in the dollar, rule of law, independent institutions, free and fair elections.
And as I illustrate in Paper Soldiers, the Treasury secretaries, in the way they've dealt with foreign governments, the dollar has this power of incumbency on its side. You know, it's like trying to say that English is not going to be the world's universal language. So that's sort of a starting point. But there is definitely more discussion about de-dollarization. It's a lot of rhetoric, a few small moves. Now, nothing would happen quickly. This could take a decade, maybe two decades to actually play out. But it would mean that multinational companies, smaller emerging markets, frontier markets and midsize economies would need to consider how they trade. So it's really hard to say exactly how this would play out. In the past it’s taken an economic crisis for a world's reserve asset to be dethroned.
Ha: Obviously it would have huge ramifications for the global economy. but, you know, you do have China, the world's second largest economy. Could China, could the yuan be a currency that supplants the dollar potentially? I mean, is there a contender to supplant the dollar?
Mohsin: There really isn't a contender. A lot of people talk about the Chinese yuan. Now, China's economy is the world's second largest, but it is still second place by a long gap. The other thing is that investors are really tied to the world's reserve asset being backed by a democracy, an open democracy, and that is not what China has. And the reason investors want democracy underpinning the anchor to the world's financial system is because that comes with transparency, which is also something that the Chinese yuan doesn't offer.
(Updated the transcript)
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