Sanctions and the Fragility of Dollar Power
Sanctions and the Fragility of Dollar Power
For more than seven decades, the U.S. dollar has sat at the center of the international financial system. Its depth, liquidity, and the credibility of U.S. institutions made it the default reserve currency and the medium through which much of global trade was conducted. That centrality also allowed the United States and its allies to transform sanctions from narrow penalties into instruments with extraordinary reach.
Cutting access to dollar clearing or freezing assets in U.S. banks could isolate an adversary from world markets overnight. Yet each time this power has been used more broadly, it has revealed its limits, for the very act of weaponizing the dollar pushes others to reduce their exposure to it.
Dollar primacy depends not only on market scale but on trust. Central banks hold reserves in dollars because they believe those assets are safe from arbitrary interference. Firms invoice in dollars because they rely on liquid markets and predictable legal protections.
When Russian central bank reserves were frozen in 2022, the action showed the force of financial coercion. But it also signaled to other governments that reserves held abroad could be vulnerable in times of political conflict. This lesson has resonated not only with rivals but with states that worry about becoming collateral in future disputes.
Financial sanctions extend beyond headline measures. Blocking banks from global payment systems, restricting insurers, and penalizing shipping services all create immediate pressure. They also draw attention to the risks of reliance on a single system. Central banks have responded by modestly diversifying, increasing their gold holdings, or shifting some reserves into other currencies.
These moves remain small compared with the dominance of the dollar, but they show how trust erodes at the edges. Power rooted in confidence is not depleted suddenly; it is weakened gradually as hedging becomes routine.
The signs of adjustment are visible. Central banks purchased record amounts of gold in 2022 and 2023. China’s cross-border payment platform expanded its role in trade with Russia. More commodity sales are invoiced in renminbi or local currencies. None of these developments displace the dollar outright, yet together they reshape incentives. States are not leaving the dollar system; they are reducing their vulnerability to it. That insurance may look limited today, but once embedded it is difficult to reverse.
This matters because sanctions have become the default response to aggression and crisis. Their frequency and scope have grown, and with them the likelihood that others will look for ways around U.S. financial power.
Reputational costs accumulate when the system appears politicized. The dollar still dominates, but its future strength rests on confidence that reserves and transactions remain neutral. If that confidence wanes, even slowly, the reach of sanctions narrows over time.
The issue is not whether the dollar remains first among currencies. It will, given its unmatched markets and institutions. The real question is whether that position can be preserved while using it repeatedly as an instrument of coercion. Each extension of sanctions displays strength in the present but makes diversification more attractive for the future. The very tool that secures leverage can also diminish it.
Prudence requires discipline. Sanctions will remain central to how the United States and its allies respond to conflict, but their design must balance force with restraint. Immobilizing assets can be justified; confiscating them outright risks undermining the neutrality of reserve money.
Restrictions on banks or services can punish an aggressor, but applied too broadly they accelerate fragmentation. The durability of sanctions depends not just on the pressure they impose today but on whether the financial architecture they rely on continues to inspire trust tomorrow.
Dollar power remains immense, but it is not inexhaustible. Its strength lies as much in perception as in balance sheets.
To preserve it, sanctions must be used with care — enough to uphold norms, not so much that they corrode the foundations of trust on which that power rests.