US Sanctions Reinforce the Dollar’s Dominance
Recent sanctions on the use of Russia’s international reserve assets seem likely to reduce the appeal of US dollar reserves as a “shock absorber” for international payments. But international reserves are also a means to reassure foreign investors that problematic countries will not confiscate their investments. The “collateral” motive for holding dollar reserves has been enhanced by the demonstration that the United States is willing and able to sanction misbehavior. Geopolitically risky countries now more than ever need to reassure foreign investors that their investments are safe from expropriation. We conclude that recent events will strengthen the role of the dollar as the key international reserve currency.
We thank Robert Flood for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.