The dollar won't be threatened by a multipolar geopolitical order, think tank expert says

• Geopolitics won't diminish the dominance of the US dollar, the Atlantic Council's Carla Norrlöf wrote.
• Though sanctions have discouraged dollar reserves, they also may prompt them to grow.

Geopolitical fragmentation does not immediately guarantee the breakdown of dollar dominance, a senior fellow at the Atlantic Council wrote in Project Syndicate.

Although de-dollarization efforts may well be taking form among countries such as Russia and China, Carla Norrlöf said that the importance of the greenback will largely be governed by economics, not international relations.

"Moreover, one should not assume that a more divided world will automatically give way to a more multipolar one, especially where reserve currencies are concerned," she wrote.

Norrlöf's comments come after months of analytical back-and-forth on the topic, with many experts warning that the dollar is at risk of losing its global standing, whether in trade or as a reserve currency.

That's as US sanctions — which limited Russia from accessing its dollar reserves in the wake of the Ukraine invasion — pushed some foreign central banks to move away from the dollar, as countries looked to avoid the same fate.

But, what often gets overlooked is that the conditions that prompted these sanctions can also induce a diversification into dollars, Norrlöf wrote.

"In a world where economic relations increasingly have security overtones, the 60-plus countries under the US security umbrella are likely to stick with the dollar even if they oppose Western sanctions," she wrote.

Meanwhile, although the international use of alternative currencies has also been on the rise, these have a long way to go before actually challenging the dollar.

Headlines have pointed to the Chinese yuan — whose international footprint has expanded amid new cross-border trade agreements and bilateral swap lines — but ultimately, this currency is limited by China's control of it.

Other examples include an uptick in rupee, ruble, and dirham transactions, though these remain small. And to add, Norrlöf says that trade in another currency does not necessarily do much to its international role, despite potentially eroding the greenback's presence in that transaction.

Even if these efforts were enough to crash the dollar's unipolar hold on trade, Norrlöf further points out that there is very little consensus on what would actually follow.

Often, when analysts speak of multipolarity, they're coming at it from a range of perspectives — some see a number of currencies sharing equal power on the global playing field, while others reference a world where such symmetry doesn't exist.

Not only is this confusing for constructive debate, Norrlöf argues that it's unlikely to happen.

"The pandemic and recent geopolitical developments do not justify confident bets on the dollar's demise, because the greenback's centrality is mainly determined by economic factors and an incumbency advantage that is reinforced by network effects," she wrote.