The Weaponization of the Dollar: Is De-Dollarization a Real Threat to the West?

by Minra Malik

When the United States freezes a rival’s central bank reserves or blocks access to global payment systems, it does more than sanction it weaponizes the financial order. For decades, the dollar has been the linchpin of the world economy, but in recent years it has also become, as journalist Saleha Mohsin argues in Paper Soldiers, a geopolitical weapon. This shift has sparked an urgent question: by turning the dollar into an instrument of coercion, is Washington accelerating its own undoing?

The dollar’s ‘exorbitant privilege,’ as Valéry Giscard d’Estaing once called it, has long underpinned U.S. influence. Almost 90 percent of foreign exchange trades involve dollars, and U.S. Treasury securities remain the safest asset on the planet. But that same dominance makes the system vulnerable to politicization. Legal scholar Rosa Lastra has shown how sanctions exploit the dollar’s centrality to global payments, giving Washington extraordinary reach into transactions well beyond its borders. Edward Fishman, in his book Chokepoints, describes this as a form of economic warfare: access to the dollar is both privilege and vulnerability.

Unsurprisingly, targets of U.S. power have begun to resist. Russia, excluded from much of the Western financial system after its invasion of Ukraine, has turned to the yuan and ruble in trade. China has pushed renminbi-based oil contracts and built its own payment system as an alternative to SWIFT. Across Eurasia and ASEAN, governments are experimenting with local-currency trade and swap lines to reduce dependence on the dollar. Analysts in the World Review of Political Economy and in Iranian regional studies argue that sanctions have accelerated these efforts, especially among countries wary of falling under Washington’s financial thumb.

Yet rhetoric often outpaces reality. According to the Atlantic Council, the dollar still accounts for nearly 60 percent of global reserves, a share that has hardly budged in two decades. Even within BRICS, most trade settlements remain dollar denominated. As one insider admitted of the bloc’s own New Development Bank, ‘the dollar is hot coded into the DNA of the institution.’ The yuan, touted as the great challenger, makes up less than 3 percent of reserves and remains hamstrung by China’s closed capital account.

The contradiction is striking. On the one hand, there is genuine anxiety about the risks of dollar dependence. When the U.S. and its allies froze $300 billion of Russia’s central bank assets in 2022, policymakers from Riyadh to New Delhi noticed. If Moscow’s reserves could be locked away overnight, what was to stop Washington from doing the same to others? A BIS survey found that many emerging-market central banks are quietly diversifying reserves as insurance against political exposure.

On the other hand, alternatives remain weak. The Euro has struggled to expand its global role because of political fragmentation in the eurozone. Regional schemes in Asia and Latin America have limited scope and liquidity. The renminbi may be rising, but Beijing’s refusal to liberalize capital markets undermines its credibility as a truly global currency. As scholars of de-dollarization note, alternatives exist in theory, but in practice the dollar’s depth, liquidity, and trust remain unmatched.

That trust, however, is precisely what Washington risks eroding. Financial historian Adam Tooze has emphasized that the dollar system works because the U.S. is seen as predictable and rules based. Aggressive sanctions, while effective in the short run, chip away at that perception. Mohsin makes a similar point: the Treasury may win tactical victories through financial coercion, but each strike plants seeds of long-term doubt about American neutrality. The paradox is that the very success of sanctions could weaken the system that makes them possible.

None of this means the dollar is on the brink of collapse. Investors still rush into dollars during crises, and U.S. Treasuries remain the world’s ultimate safe asset. Even Bank of America strategists, while acknowledging the currency’s cyclical weakness, stress that demand for dollar-denominated assets continues to rise. When global uncertainty spikes, few bet on yuan or rubles; they buy dollars.

So, is de-dollarization a real threat to the West? The sober answer is that it is both overstated and underestimated. Overstated, because the structural dominance of the dollar will not disappear overnight; no rival currency offers the same combination of scale, liquidity, and institutional backing. Underestimated, because the slow erosion of trust the perception that access to the dollar is contingent on Washington’s favour could push countries to build parallel systems over time. The danger is not a collapse but a gradual drift.

The policy challenge for the U.S. and its allies is therefore one of calibration. Use sanctions too sparingly, and they lose credibility as a deterrent. Use them too broadly, and they erode the very confidence that sustains dollar supremacy. The West’s financial power depends not just on the size of its markets, but on the belief that the system is open, reliable, and neutral. That belief is harder to weaponize than any asset freeze and easier to lose.

The weaponization of the dollar, then, is a double-edged sword. It gives Washington extraordinary leverage today, but risks undermining the foundations of its power tomorrow. The dollar is not about to be dethroned, but if the U.S. treats its privilege as permanent, it may find itself hastening the very shift it fears.