PAPER SOLDIERS

An investigation of the back-and-forth between advocates of a strong dollar and those of a weak one.

The U.S. dollar has long been weaponized, writes financial journalist Mohsin, most lately by the Biden administration using dollar-based sanctions against Iran and Russia. The result is precarious: “The dollar is no longer there for the greater good but for those who align with America.” In 2001, some 73% of central bank foreign exchange funds were held in dollars, but that figure is now below 60%. Part of the problem is that administrations, apart from using the dollar as a weapon, have also not been able to decide whether the dollar should be strong or weak: Trump, for instance, initially held out for a weak dollar to increase the desirability of American goods abroad, but when foreign investors went fleeing, he changed his mind and bellowed demands for a strong dollar. Fortunately, he had a competent, if too compliant, treasury secretary in Steven Mnuchin, and the logic that “if the government was invested in keeping its currency strong, investors would have more reason to feel confident in bonds issued by the United States” held. However, if investors do flee, where will they go? There have been fears that the dollar will no longer be the world’s chief currency, fears that have a basis in reality, but the leading competitors have even greater problems: The euro represents too small a market; the yuan, a state that few trust. Though knowing something about fiscal policy will help readers, Mohsin is a capable interpreter of the interaction between finance and politics. It’s a messy business: Every time Congress dithers about the debt limit, foreigners begin to doubt the soundness of the dollar, which could turn out to have disastrous consequences.

An engaging outing for financial policy wonks that should also serve as a warning to economic policymakers.