While attempts by other countries to move away from the U.S. currency are often cited as a driving force behind dedollarization, those concerned about this trend should look to the U.S. as the main culprit.
That's because growing American dysfunction - whether political or fiscal - is the real threat to the dollar's international role, analysts Stephen B. Kamin and Mark Sobel wrote Monday.
De-dollarization is a trend gaining momentum in recent years that aims to reduce the world's dependence on the U.S. dollar, which is the backbone of global trade and the largest reserve currency of the world's central banks.
Proponents of the idea argue that dedollarization will free foreign economies from the risk of U.S. sanctions and give alternative tenders more power and independence.
While they have attracted much attention, foreign efforts to promote the trend are dubious at best, Kamin and Sobel write. Possible competitors to the dollar, such as the euro and the Chinese yuan, do not share the dollar's enormous advantages that make it so popular.
"The U.S. economy is huge - about 25 percent of global GDP. It is also more innovative, entrepreneurial and fast-growing than almost all of its peers in developed economies. U.S. financial markets are the deepest, most liquid and open in the world. The rule of law is very strong, and investor protection extends to residents and foreigners alike," they say.
At the same time, sanctions may not warrant a major dollar pullback if the U.S. uses them with the support of geopolitical allies. That was the case with Russia, which lost access to the dollar after the invasion of Ukraine. Aside from calls for dedollarization, the consequences have been limited.
Debates focused on the actions of foreign countries miss the point that the power of the dollar is primarily the result of U.S. economic leadership - when it begins to crumble, the alarm about dedollarization should be sounded.
In their view, a number of factors could exacerbate this risk: on the domestic front, these include political dysfunction, excessive U.S. spending and debt, and limitations on the Fed's independence.
And that's only half the list. Increasing trade protectionism and the potential for unilateral financial sanctions exacerbate de-dollarization. Threats to devalue the dollar - which makes U.S. exports cheaper - do not bode well either.
"The dollar's global role would decline and market turmoil and volatility would set in. This malignant scenario would be extremely damaging to global prosperity, including American prosperity," they wrote, later adding, "Unless the U.S. gets its house in order, dollar dominance will be the least of our worries."
