When you think of challenges to the mighty U.S. dollar’s global dominance, the usual suspects like China’s yuan or Europe’s euro might come to mind. But what if we told you that the biggest antagonist to the greenback isn’t an international contender, but the U.S. itself? This is the clarion call sounded by top economist Benn Steil.

Homegrown Concerns Over the Greenback

In his recent commentary, Steil, who helms the position of Director of International Economics for the Council on Foreign Relations, put the spotlight on internal U.S. challenges rather than external ones. He believes the dollar’s leading position isn’t primarily under siege from rival currencies. Instead, Steil suggests, “The biggest threat to the dollar’s dominance comes not from competitive alternatives, but from the US government itself.”

Illustrating his point, Steil drew attention to the recent political impasse, where the Biden administration narrowly escaped a governmental debt default. Such a close call didn’t go unnoticed. Rating agency Fitch, in reaction, downgraded the U.S. credit score, reflecting concerns over governance standards.

The Greenback’s Shrinking Slice of the Global Pie

Digging into the numbers, the U.S. dollar’s share of global foreign-exchange reserves has seen a reduction. Data from the International Monetary Fund reveals a drop from 72% to 59% over the past two-plus decades. Such a trend could potentially put the U.S. at risk of losing colossal leverage in the economic arena.

However, Steil’s perspective offers a twist. He doesn’t foresee significant challenges to the dollar’s supremacy coming from the euro (still grappling with Brexit aftershocks) or the Chinese yuan (which has a modest 3% share of global reserves). The real concern, he underscores, is domestic political hitches that could tarnish the dollar’s allure.

Currency “Weaponization” – A Double-Edged Sword?

The term “weaponization” of currencies is quickly gaining traction, and the U.S. has been at the center of this discourse. For instance, the Biden administration, in response to geopolitical tensions, excluded Russia’s banks from the SWIFT payment system and froze its dollar reserves. Such maneuvers, though strategic, have drawn criticism from a broad spectrum of voices, from Steil to industry magnate Elon Musk.

Drawing a compelling analogy, Steil equated the overuse of sanctions to the misuse of antibiotics. He wrote, “Just as the overuse of antibiotics fuels antimicrobial resistance, excessive use of sanctions prompts targeted countries, as well as potential targets, to reduce their engagement with the US financial system.”

Wrapping It Up

For our entrepreneurs and investors, the currency landscape and its potential shifts are more than academic musings. The U.S. dollar’s position in the global financial system impacts everything from international trade deals to portfolio diversifications. The big takeaway? Keeping an eagle eye on both international and domestic dynamics is essential in our interconnected economic world.