The almighty Dollar and the havoc it has wreaked

"Give me control of a nation's money supply, and I care not who makes its laws."

This maxim, often attributed to Amschel Rothschild, founder of the Rothschild banking dynasty, isn't just a one-off statement or a brag. On a macro level, i.e., looking at the globe and the dominance of the dollar, the statement holds true. If you control the global money supply, should you even be perturbed by laws?

When the 1944 Bretton Woods agreement came into place, the link between money supply and gold reserves began to erode the world over, leaving the future of many currencies in the air. 

This is when the dollar came into play, filling a desperately needed vacuum. 

Against an onslaught of other currencies — the euro, yuan or yen — competing to displace the dollar's position at the top of the chain, the greenback has persisted. 

Its presence has helped, but it has also hindered the global political economy. 

One lesson from the Russia-Ukraine war is how fast the dollar was weaponized. There is, however, a reason behind this weaponization and why the world allowed it, despite their own currencies tumbling as a result. 

The US may account for about 20% of the world's economic output, but more than half of all global currency reserves and trade is in dollars. As the war grew in intensity, investors rushed towards safer assets, propelling the dollar to its highest level since the pandemic.

What happened here was a theory known as the "dollar smile", which posits that a strong dollar tends to emerge when the global economy "sours and traders rush for safety".

The second part of the smile depends on the health of the US economy compared to others.

As investors rushed for the safety of the greenbacks, its demand rose, and so did its price. 

The dollar, which hadn't been its strongest, now began to peak. As the dollar's value rose, other currencies, including the Taka, began to suffer.

While the exchange rate for the Taka hovered around Tk84 per dollar, after the war broke out, it reached as high as a staggering Tk107 per dollar. 

The euro exchange rate also plunged, going from $1.20 in 2021 to $1.13 by the start of 2022. 

The dollar is at its highest level since 2000, having appreciated 22% against the yen, 13% against the euro and 6% against emerging market currencies since the start of 2022, according to the International Monetary Fund. 

But how has the US made an armament of sorts out of the dollar?

How the USD is weaponized

The dollar and the conspiracies surrounding it are difficult to separate. Some quarters believe that the US will leave no stone unturned to protect the dollar at all costs.

According to some accounts, Saddam Hussein's downfall came as a result of moving away from the dollar. In October 2000, Iraq insisted on dumping the US dollar —  "the currency of the enemy" — for the euro. Three years later, the country was invaded. 

Libya's Muammar Gaddafi had proposed "a single African military force, a single currency and a single passport for Africans to move freely around the continent," in 2009. Two years later, he was also dead. 

These incidents have only gone to feed the conspiracy and myth surrounding the dollar. 

In reality though, the US has a multitude of ways in which it has weaponized the dollar over the years. 

Instead of overt bombing and armed invasions, the United States weaponized the dollar through a combination of economic and political policies which helped to establish the USD as the dominant global currency.

As the primary reserve currency for the world's central banks, the dollar already wields heavy influence, both economic and political.

But at the same time, the US also relies heavily on its sanctions programmes. 

It has a slew of legislation just for this purpose: the International Emergency Economic Powers Act, the Trading With the Enemy Act and the Patriot Act allow Washington, all of which can help weaponize payment flows, among others.

The sanctions can target individuals, organisations, regimes or even entire countries. It can stop anyone from doing business with someone else using the dollar. Any dollar payment flowing through a US bank or the American payments system can lead to prosecution against the offender and even seizures of their American assets. 

The US can also exert financial pressure, such as restricting access to the US financial system and limiting foreign banks' ability to conduct transactions in the American dollar.

For instance, the US and EU, together, decided to cut Russia off SWIFT, from which the US can get data at any time to ensure it's word is law. 

The US also holds considerable sway in the decision-making powers of crucial multilateral institutions like the World Bank or IMF, which don't outright favour dollars. 

These institutions also lack their own sovereignty to enforce or encourage a shift away from the dollar. 

Finally, the US has worked to promote the dollar as the preferred currency for international trade and investment, offering various incentives to encourage foreign entities to use the dollar for transactions, which helps reinforce its status as the dominant global currency. 

The dollar has become a powerful weapon in the US foreign policy arsenal. 

A shift?

The increasingly aggressive use of the dollar as a means of coercion has alarmed the rest of the world. Has America gone too far?

Since the war broke, countries have tried to replace the dollar.

India, China and Russia have tried to broker deals in their own currencies, especially amid a dollar crunch. China, which harbours ambitions for the yuan as a replacement currency this century, was quick to try to alleviate the stress from the crunch, while India waited on the wings to internationalise the rupee. 

As part of the US weaponization of the dollar, still covert at this point, the country reprimanded Russia for invading Ukraine by cutting it out of the SWIFT system, the global financial artery which allows rapid transfer of money across borders.

No deals with Russia meant an energy crisis slowly gripping the world. Against this backdrop, Russia made overtures to several countries, including Bangladesh, to use their own currencies to trade.

Nothing consequential has emerged from these so far. But perhaps, with the lessons of the war in mind, the winds of change have begun. After all, change is inevitable and even the mightiest eventually fall.

Illustration: TBS

The author is a journalist.