Dollar's dominance on the edge? Top economist warns global shift will weaken US sanctions muscle
Top American economist Kenneth Rogoff warned that growing diversification away from the dollar will push up U.S. interest rates and weaken Washington’s ability to impose financial sanctions.
“So de-dollarisation or diversification away from the dollar. I don’t think the dollar is going to disappear or anything’s going to replace it. But there’s diversification into other currencies particularly Euro, eventually the Chinese Renminbi, and frankly cryptocurrency,” Rogoff told NDTV in an interview.
He said this shift would erode U.S. financial leverage. “That diversification raises interest rates in the US. It makes it more difficult for the US to impose financial sanctions,” he explained. “If there’s just one credit card company, say Visa, and Visa decides to cut you off, that’s very damaging. But if there are other credit card companies like American Express and Mastercard, it doesn’t matter so much. So, as there’s diversification away from the dollar, that’s going to take that weapon away.”
Rogoff further warned that countries may reduce their dollar reserves even without switching to other currencies. “As countries conserve on their reserves, their holdings of treasury bills—and they will do that even if they don’t substitute into other currencies, it’s just less attractive. That also is going to raise interest rates. And coming back to the first issue we discussed, that’s going to make the debt problem harder to resolve for the United States.”
On U.S. debt, Rogoff highlighted its historic highs and the challenges created by rising interest rates. “One of the biggest vulnerabilities of the US economy is indeed the debt burden, which is now reaching its all-time record for federal debt anyway. And what’s changed is that today interest rates are much higher,” he said. “We’re in a situation where the debt’s very high. It’s galloping out of control and the US is probably much less resilient to a shock than it had been.”
He also criticised Donald Trump’s proposed tariff hikes, particularly the plan to impose 50% tariffs on Indian goods. “Those are very destructive. I assume he thinks he won’t actually have to do it, but it’s still a pretty brutal thing to threaten the Indian economy with,” Rogoff said.
While not expecting an immediate crisis, Rogoff cautioned that the U.S. faces heightened risks. “Crisis happen when you have high debt, when you have political paralysis, and when a shock catches you on your heels. We haven’t had that yet but eventually, we will.”