Tue. Jul 5th, 2022

Barry Eichengreen (“Ukraine war accelerates the stealth erosion of dollar dominance”, Markets Insight, March 28) is surely right in pointing out that the sanctions imposed on Russia will make the dollar less attractive as a reserve currency. He suggests that there will be further diversification into the currencies of Canada, Australia, Sweden, South Korea and Singapore. As he rightly says, however, that would make sense only in a scenario in which the US freezes a country’s reserves but other governments do not go along. Such a scenario might come to pass, but it could hardly be relied on, and it would not be a sound foundation for a reserve management policy.

Another possibility, which I think more likely, is that governments will decide that holding reserves in any foreign currency now involves too much political risk, and that it would be wiser to hold reserves in the form of commodities, such as gold, oil and other primary products, access to which can not be withheld by a foreign power.

William A Allen
Visitor, National Institute of Economic and Social Research
London SW1, UK

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