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When Russia invaded Ukraine in February 2022, it seemed like a transformational moment for European security. Surely now Europe would finally get its act together on defense. But as the war enters its second year, such a transformation has not materialized. The fault for the ongoing stasis lies with many parties—European states, NATO, the European Union and even the United States—all of whom have defaulted to the comfortable practices of the past in the hope of preserving an untenable status quo.

This is not to say that Europe has not been altered by the war. European publics and their leaders have rallied in support of Ukraine and maintained their support despite skyrocketing energy prices and high inflation. European countries have provided massive quantities of arms to Ukraine although not as much as the United States. Finland and Sweden have applied to join NATO. The EU has provided billions in lethal equipment to Ukraine and is training Ukrainian forces. And the sense of shock and urgency felt by European leaders in response to the Russian invasion of Ukraine is reflected clearly in defense spending hikes. Now most European countries in NATO come close to the organization’s goal that all members spend at least two percent of GDP on defense, with some countries such as Poland and the Baltic states spending far more.

Russia’s invasion of Ukraine punctured many assumptions about the future of the world and thus was a pivotal moment in history. America and the West can no longer maintain a false sense of security based on the illusion that dictatorships and oppressive nations won’t use their economic and military powers to advance their aims—particularly against what they perceive as weak, incompetent and disorganized Western democracies. In a troubled world, we are reminded that national security is and always will be paramount, even if it seems to recede in tranquil times.

It should also lay to rest the idea that America can stand alone. U.S. leaders must always put America first, but global peace and order is a vital American interest. Only America has the full capability to lead and coalesce the Western world, though we must do so respectfully and in partnership with our allies. Without cohesiveness and unity with our allies, autocratic forces will divide and conquer the bickering West. America needs to lead with its strengths—not only military but also economic, diplomatic and moral. Here’s what we can do:

Why sanctions are an unlikely tipping point for dollar dominance

Following Russia’s invasion of Ukraine, geopolitical blowback is widely seen as threatening dollar dominance. To fully grasp what today’s turbulence means for the dollar system, we must however move beyond the motivations of countries targeted by sanctions. Many countries benefit from US currency coercion because they share the core principles behind US sanctions. Countries supporting sanctions on Russia have strong geopolitical incentives to continue holding and using dollars for international reserve and payment purposes. Supporting the dollar reinforces the constraining impact of the sanctions and helps ensure their future effectiveness. The economic incentives these governments previously had to diversify away from traditional currencies, particularly the US dollar must now be weighed against their geopolitical incentives to hold dollars. Together, the coalition arrayed against Russia accounts for more than ninety percent of global currency reserves, approximately eighty percent of global investment, and sixty percent of world trade and world economic output. Overcoming that dominance would be difficult even if every country that has declined to sanction Russia fell in line behind an organized anti-dollar coalition. Moreover, countries not participating in sanctions against Russia do not necessarily disagree with the goals behind them: ending the war in Ukraine and deterring future territorial aggression. The coalition behind the sanctions against Russia is broad, wealthy, and militarily powerful, and its objective of ending Russia’s barbarous war is widely shared, even by those not participating in the sanctions. Geopolitically induced dollar support is rather likely to stabilize dollar holdings.

Unless political developments within the United States or US foreign policies radically shake confidence in the United States and access to dollars, economic factors are more likely to determine the fate of the dollar system.

While the dollar enjoys an extraordinary lead over other international currencies, it is not invincible. Poor domestic policies could shake confidence in the dollar. Structurally, the United States’ liquidity-creating role—providing dollar assets to the rest of the world—and the ability to invest in the United States can interact unfavorably with low savings in the United States, resulting in large deficits, rising public and/or private debt. Unlike the euro-zone, however, the United States does not face the prospect of involuntary sovereign default because the dollar is a convertible sovereign currency. The recent specter of US default, a possibility which arises periodically, is entirely voluntary and due to a self-imposed debt ceiling. In the United States, the upper bound of the debt limit is rather determined by foreigners’ willingness to hold dollars, at worst resulting in inflation and depreciation. Although the United States cannot be forced to default, such an adjustment process may not be benign.

What about the DDC led by BRICS? The campaign may have triggered the debut of a seemingly much stronger nudge yet in the trend of de-dollarisation. The question is: How likely and how soon would DDC succeed? I argue that the dominance of the dollar to be a history of “bygone days” will not happen so soon and so easily.

First of all, BRICS is just a collection of countries which don’t have much in common with each other – essentially a cocktail of countries with free market capitalism (democracies) and mixed economies (autocracies). Most of these countries trade more with the US and Europe, than they do together. China and India were mutually at daggers drawn recently with border disputes. Russia is in economic and financial self-destruct mode (forcing Bangladesh to make Nuclear Reactor loan installment payment in Yuan, if not in Ruble); Brazil has fallen a decade behind in economic growth; while South Africa got stuck in a recessionary ditch even before the pandemic. Besides, BRICS countries lack the necessary level of trust and institutions to actually create a currency viable enough to serve as a GRC. Even China has baggage of some deficiencies — highly centralised and doesn’t have free, liquid, and deregulated capital markets to challenge the US dollar.

Over the course of half a century, the dollar’s reserve currency role was strongest in the years following the collapse of the Bretton Woods dollar standard when President Nixon abandoned the promise to convert dollar reserves into gold—the 1971 Nixon shock. Regardless of which measure of dominance is used—polarity or systemic concentration—the dollar is significantly lower today than it was in 1973. However, the dollar’s reserve currency role is stronger than it was in 1990 when the Cold War ended. In a fifty-year perspective, the dollar reached a low point at that time, a period otherwise considered to mark the onset of America’s unipolar moment. Clearly, the level of reserve currency holdings in a single year, or within a limited time frame, is not a good predictor of US ascendancy or decline in any broader sense. Point estimates of reserve currency holdings are not a good predictor of dollar dominance either. That is because the liquidity creating role, assumed by the issuer of the first international currency, requires adjustment of expansionary policies, resulting in cycles of trade deficits when demand for dollar assets is typically high and deficit adjustment when dollar demand tends to fall. Depending on the measure used to assess dollar dominance, the most recent downward dollar cycle began in 2016 (polarity) or 2017 (concentration). According to both measures, an upward cycle began in 2020 and stabilized despite the 2022 sanctions against Russia.

It is important to note that the dollar has a history. The dollar is recognized as an international currency not only because of the US market size but also its history in international treaties and negotiations seeking the alignment of mutual interests in international trade. The yuan still has a long way to go in that direction.

In order for the yuan be the next international currency, perhaps the Chinese Communist Party would have to reduce power. The Chinese authorities probably know this but seem to want to postpone it as much as possible. International banks and institutional investors will only want to accumulate yuan if they can move their money into and out of China freely and if banks are strong enough to keep up with the waves of a market-driven economy. This means there are many variables to consider before promoting the yuan to the status of the main international currency.

The US economy, with GDP of nearly $25 trillion vs. China’s $18.00 trillion, is the largest, most flexible, and open enough to accommodate large trade deficits caused by the dollar’s predominant status. Besides, being the most stable democratic system with rule of law, effective checks and balances, and free media, the U.S. stands out as the most reliable economy and the largest and vibrant financial market for domestic and foreign investors. Nearly 50 per cent of international trade is invoiced in dollars, and nearly the same per cent of all international loans and global debt securities are denominated in dollars. Currency trades in the foreign exchange markets involve the dollar nearly in 90 per cent of all transactions. It may be noted that there are approximately $1.74 trillion paper dollars in circulation of which overseas circulations are roughly estimated to be in the rage of 40 to 72 per cent.

It is estimated that more than 33 per cent of global GDP comes from countries that peg their currencies to the dollar. Seven among these countries have adopted dollar as their domestic currency and another 89 countries have been maintaining their currency in a narrow trading range relative to the dollar.

Generations of American policymakers have been right to protect the dollar’s key currency role for economic reasons. Most notably, dollar hegemony affords the U.S. the ability to run large and prolonged budget and balance-of-payments deficits. The dollar represents 62 percent of allocated foreign exchange reserves, is used to invoice and settle roughly half of world trade, and accounts for 42 percent of global payments. Because governments, banks, and businesses worldwide need lots of dollars, the world market always stands ready to absorb new U.S.-dollar-denominated debt without charging higher interest rates.

Adler and Bessner correctly point out that the rest of the world considers the dollar’s role as the world’s reserve currency to be an “exorbitant privilege,” a term coined in the 1960s by then French Finance Minister Valéry Giscard D’Estaing. The ability to spend beyond its means has enabled the U.S. to fund its impressive military might, whether one views that power as the fountainhead of Pax Americana or the source of illegitimate military adventurism.

It isn’t even clear that the U.S. could “end” the dollar’s dominance, even if it wanted to. The dollar’s use in trade and payments reflects the decisions of many global actors, including but not limited to foreign governments. Companies and financial institutions overwhelmingly choose to use dollars because of the unrivaled depth and liquidity of the dollar financial market; at present, no other currency is ready to play this role. The only way the U.S. could change this would be to dramatically contract its borrowing, which would likely cause a global recession.

Adler and Bessner’s argument gets at a dilemma at the heart of international monetary politics. Since Bretton Woods, the dollar has played two roles that sometimes end up at cross-purposes: It is the domestic money for the U.S. and the international unit of account for the globalized economy. No other country has been willing to allow its currency to be used in this way (or issued a currency capable of it). But without some currency playing this role, economic globalization as we know it cannot continue.

Dear Committee Members, thank you Chairman Luetkemeyer and Ranking Member Beaty for inviting me to testify on the important topic of dollar dominance and the preservation of the dollar’s status as a global reserve currency. I am honored. Despite numerous challenges, dollar dominance has persisted for nearly eighty years. Why does the dollar continue to play such a prominent role, is the dollar likely to reign supreme over the long term, and what are the most important threats on the horizon?

The extent of US dollar dominance and its preservation has become a principal theater for the great power struggle between the United States, China, and Russia—placing the future of liberal international order in the balance. The dollar is the only truly global currency in the world, and is widely used for transactions, pricing, settlement, and investment by governments and private actors outside the United States. These roles offer the United States economic, political, and social privileges. Economically, Americans benefit from the ease and convenience of transacting in dollars, from seigniorage, monetary flexibility, and safe-haven benefits in times crisis. Politically, the dollar offers the United States a non-military instrument of coercion with which to police international order. Socially, the United States gains status and prestige. Preserving the dollar’s status as the global currency is therefore in the United States’ interest, and potentially in other countries’ interest.

Will the Sino-Russian strategy succeed? My research suggests “dollar hegemony” is stable for many reasons, primarily due to the United States’ financial centrality and ability to secure investments. The measures announced so far, such as de-dollarization, renminbi digitalization, and alternative financial settlement and messaging systems, are unlikely to kick the dollar to the curb. But the reaction from America’s rivals underscores the limits of the dollar as a tool of deterrence.

It’s a high-stakes currency game

In Moscow, meanwhile, Xi Jinping, stringing along his Russian puppet, Vladimir Putin, proposed a new global order to replace the post-1945 US-led model. China’s de facto dictator is generously offering to “stand guard” over the planet. In Xi’s brave new world, subservience and surveillance replace shock and awe. Democracy takes a back seat.

That Iraq was a catastrophic, avoidable own goal is no longer plausibly disputed. Numerous prior warnings went unheeded. Yet similarly shortsighted are present-day attempts, from the far right and left, to use that debacle to discredit US-led interventionism in general and celebrate the consequent decline of American influence.

U.S. forces would defend Taiwan if China invaded, President Joe Biden said Sunday, his clearest statement yet on the issue and one criticized by Beijing as a violation of longstanding U.S. policy.

In a “60 Minutes” interview broadcast on CBS, Biden was asked whether the U.S. would defend Taiwan against an attack from Beijing, which claims the self-ruling island democracy as its territory.

In the days that followed, China also sent nuclear-capable H-6 heavy bombers across the median line in the Taiwan Strait, a previously respected informal boundary between China and that island. Worse yet, state-owned media displayed images of Dongfeng-17 (DF-17) hypersonic ballistic missiles, also believed capable of carrying nuclear weapons, being moved into positions off Taiwan.

Washington has not overtly deployed nuclear-capable weaponry in such a brazen fashion near Chinese territory, but it certainly has sent aircraft carriers and guided-missile warships into the area, signaling its ability to launch attacks on the mainland should a war break out. While Pelosi was in Taiwan, for example, the Navy deployed the carrier USS Ronald Reagan with its flotilla of escort vessels in nearby waters. Military officials in both countries are all too aware that should such ships ever attack Chinese territory, those DF-15s and DF-17s would be let loose against them—and, if armed with nuclear warheads, would likely provoke a US nuclear response.

WASHINGTON — President Biden and his aides have tried to reassure Chinese leaders that they do not seek to contain China in the same way the Americans did with the Soviet Union during the Cold War.

But the announcement on Thursday that the U.S. military is expanding its presence in the Philippines leaves little doubt that the United States is positioning itself to constrain China’s armed forces and bolstering its ability to defend Taiwan.

Editor's note: American leadership in Asia holds the most promise of protecting the peace, preserving respect for rule of law and human rights, unlocking opportunities for U.S. businesses, and increasing burden-sharing for dealing with transnational challenges, writes Ryan Hass. This piece originally appeared in The Seattle Times.

In recent weeks, and particularly following President Donald Trump’s November trip to East Asia, I have heard one recurring question in my travels around the United States: Why is it that big a deal if the United States cedes leadership in Asia to China?

Robert Kagan 22, Stephen and Barbara Friedman Senior Fellow at the Brookings Institution, 4/6/22, “The Price of Hegemony: Can America Learn to Use Its Power?”, , vw

Some Western analysts nonetheless argued when the Cold War ended, and continue to argue now, that Washington and western Europe should have given in to Russia’s demand. But if Moscow could not enforce a sphere, then on what grounds should the West have acceded? Fairness? Justice? Spheres of interest are not about justice, and even if they were, consigning the Poles and other eastern Europeans to subservience to Moscow would have been a dubious justice. They knew what it was like to be under Moscow’s sway—the loss of independence, the imposition of rulers willing to take direction from the Kremlin, the squelching of individual liberties. The only way they would have accepted a return to Russia’s sphere was if they were compelled to by a combination of Russian pressure and the studied indifference of the West.

When Russia invaded Ukraine in February 2022, it seemed like a transformational moment for European security. Surely now Europe would finally get its act together on defense. But as the war enters its second year, such a transformation has not materialized. The fault for the ongoing stasis lies with many parties—European states, NATO, the European Union and even the United States—all of whom have defaulted to the comfortable practices of the past in the hope of preserving an untenable status quo.

This is not to say that Europe has not been altered by the war. European publics and their leaders have rallied in support of Ukraine and maintained their support despite skyrocketing energy prices and high inflation. European countries have provided massive quantities of arms to Ukraine although not as much as the United States. Finland and Sweden have applied to join NATO. The EU has provided billions in lethal equipment to Ukraine and is training Ukrainian forces. And the sense of shock and urgency felt by European leaders in response to the Russian invasion of Ukraine is reflected clearly in defense spending hikes. Now most European countries in NATO come close to the organization’s goal that all members spend at least two percent of GDP on defense, with some countries such as Poland and the Baltic states spending far more.