Dollar dominance is stronger because of sanctions, not weaker, says former Treasury official

• Sanctions support — not weaken — dollar dominance, former Treasury official Dan Katz wrote.
• Countries willing to accept the risk of sanctions signal to investors that they are safe, he added.

Arguments that US sanctions are a threat to the greenback's strength fail to account for how such measures uplift the dollar, former Treasury Department adviser Dan Katz wrote in Barron's.

In fact, hesitancy to use such measures would do more to undermine faith in the dollar, he added.

"In reality, US sanctions are a fundamental part of the series of tradeoffs that create a stable equilibrium of dollar use in the global economy," he wrote. "Over the long term, US sanctions are a key pillar of, not a threat to, dollar dominance."

While the US has used sanctions for decades, the freezing of Russia's foreign currency reserves after its invasion of Ukraine last year has led to renewed warnings of de-dollarization.

Central banks have substantially increased their purchases of gold over the past year, and US rivals like China have pushed the use of non-dollar currencies in trade deals.

Even Treasury Secretary Janet Yellen acknowledged the potential downside, telling CNN in April that, "There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar."

However, Katz said the dollar's share of reserve assets has been stayed around 60% since 2008 despite a sharp increase in the use of sanctions over the last decade, with changes largely due to valuation. Meanwhile, the dollar's share of international transactions rose to 88% in 2022 from 85% in 2010, he added.

Other analyses paint a different picture. Eurizon SLJ Asset Management said last month that the dollar's standing as a reserve currency eroded last year at 10 times the pace seen in the past two decades.

Still, Katz said demand for dollar reserves will continue due to sanctions, not in spite of them.

Although he acknowledged that using the greenback does open a country up to the risk of sanctions, a willingness to do so is a sign to investors that a nation's market is safe and unlikely to fall into bad behavior. This is especially important to developing regions that must attract foreign capital.

"Sanctions strengthen the credibility of the commitment not to confiscate private investors' assets, engendering more confidence, more global capital flows, and more secure reserve status for the dollar," he wrote.

Meanwhile, current-account surplus countries like China benefit greatly from dollar access, allowing them to trade with deficit countries and import Western technology. The risk of sanctions is the price paid for a breadth of advantages, Katz said.

The US should still consider how it uses sanctions, given that the policy has increasingly become a measure of first resort, in place of other foreign policy strategies, he noted.

"If sanctions pose any threat to the dollar, it is from ineffective use that undermines America's security standing, not from an active and considered approach."