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The fight to dethrone the dollar

Attempts to challenge the dollar have only strengthened its dominance

May 3, 2024, The Economist

In 2018, European officials watched President Donald Trump blow up a nuclear deal with Iran, reimpose sweeping sanctions and mull disconnecting its banks from SWIFT. They had had enough. America was using its financial hegemony to muscle allies into punishing its latest victim. European firms were fleeing Iran for fear of secondary sanctions from America.

Britain, France and Germany decided to put up a fight. Their answer was the “Instrument in Support of Trade Exchanges” (INSTEX), a barter system that could support humanitarian trade with Iran without any recourse to the dollar. Seven more EU states signed up. In March 2020 INSTEX’s inaugural transaction supported a sale of medical goods to Iran.

But INSTEX’s debut trade turned out to be its last. The Islamic Republic blocked multiple proposed deals. European firms feared that bartering alone might incur America’s wrath. INSTEX quietly folded in 2023, three years after it opened. Instead of offering an alternative to the dollar, it ended up highlighting the unassailability of the greenback’s position.

The episode captured in microcosm the scramble to erode the dollar’s pre-eminence. The world has many reasons to want strong alternative options. An erratic Washington has turned forecasting long-run economic policy—and thus the dollar’s value—into a mug’s game. Politicians engage in periodic stand-offs over whether to lift a cap on the national debt which, if not lifted, could result in a default, endangering Treasury bonds’ status as the world’s safest asset. Over the past few years, the Federal Reserve has allowed inflation to rise more dramatically than at any time since the 1980s, and has yet to bring it fully under control.

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