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- De-dollarization talk has gathered steam this year, with China and Russia both trying to undermine the greenback.
- But the US itself poses the biggest threat to the buck's dominance, according to Benn Steil.
- Debt-ceiling standoffs and “growing weaponization” could undermine the currency, he said.
Forget China or Russia – the biggest threat to the dollar right now is the US itself, according to Benn Steil.
In an op-ed for Project Syndicate Wednesday, the economist warned that political deadlocks and the "growing weaponization" of currencies will help to fuel dedollarization, which refers to a co-ordinated effort by other countries to chip away at the greenback's dominance.
"The biggest threat to the dollar's dominance comes not from competitive alternatives, but from the US government itself," Steil, who's the director of international economics for the Council on Foreign Relations, wrote.
In late May, the Biden administration and House of Representatives reached an 11th-hour deal to prevent the US government from defaulting on its debts – and ratings agency Fitch responded to the deadlock by slashing the US's credit score earlier this month.
The dollar's share of global foreign-exchange reserves has slumped from 72% to 59% over the past 23 years, according to data from the International Monetary Fund, heightening fears that the US could see a massive source of economic power slip away.
But neither the euro, which is still reeling from the UK leaving the European Union, nor the Chinese yuan, which holds just a 3% share of world reserves, are likely to compete with the greenback, according to Steil.
Instead, the economist is more worried about political issues diminishing the buck's appeal.
Earlier this month, ratings agency Fitch slashed the US's credit score after warning the first-half debt-ceiling standoff exemplified a "steady deterioration in standards of governance".
Meanwhile, the Biden administration has also worked the currency into its efforts to aid Ukraine, cutting Russia's banks out of the SWIFT payments system and freezing Moscow's dollar reserves after Vladimir Putin invaded the country in February 2022 – a so-called "weaponization" that's earned rebukes from figures ranging from Steil to Elon Musk.
"Just as the overuse of antibiotics fuels antimicrobial resistance, excessive use of sanctions prompts targeted countries, as well as potential targets, to reduce their engagement with the US financial system," Steil wrote.