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U.S. officials leveraging the dollar’s dominance as a reserve currency to wield influence should heed the lessons of the Sterling Area’s decline, according to a newly published study.
The paper, released this month by the Centre for Economic History at Queen’s University Belfast, looks at how international monetary leadership can end by chronicling the disintegration of the pound’s hold on the global economy in the decades after World War II.
“In findings that should worry U.S. leaders tempted to weaponize the dollar for geostrategic gains, we find that constraints imposed on Sterling Area members accelerated exits,” the authors wrote. “Just as recent U.S. efforts to sanction and exclude countries from the dollar order have accelerated efforts to find alternatives, so too did Britain’s imposition of direct controls and constraints.”
Under President Barack Obama’s administration, U.S. officials used the dollar’s status to deliver more muscular enforcement of sanctions, most notably by fining BNP Paribas SA almost $9 billion and suspending it from certain dollar transactions for flouting its regime.
Frustration at such policies under Donald Trump’s presidency led the European Union to a concoct a strategy in January on how to boost the role of the euro and better insulate the bloc.
“Only limited faith can be placed in the idea that dollar holders are ‘trapped’ by risks of economic loss,” the authors wrote. “The adverse downstream consequences of monetary coercion for the long-term viability of monetary power are material.”
The paper was written by Alan de Bromhead, David Jordan, and Francis Kennedy of Queen’s University and Jack Seddon of Wasada University in Tokyo.
— With assistance by Nikos Chrysoloras