The Dollar, Sanctions, and the Limits of Monetary Power

The US dollar remains the central pillar of the global financial system. It dominates cross-border payments, underpins trade invoicing, and accounts for the majority of official foreign exchange reserves. Yet in recent years, debates about the durability of dollar dominance have intensified, driven by the expanded use of financial sanctions, the emergence of digital currencies, and renewed geopolitical fragmentation.

In a recent episode of the International Risk Podcast, Dr Daniel McDowell joined Dominic Bowen to examine how these pressures are reshaping international monetary politics, and why the most likely outcome remains continuity rather than abrupt change. The discussion highlights a central tension in contemporary global finance: the dollar’s structural strength coexists with growing incentives for some states to reduce exposure to US-controlled financial infrastructure.

Why the dollar remains dominant

The persistence of dollar dominance is best explained by network effects and institutional depth. As McDowell’s research has long argued, monetary systems are characterised by strong inertia. The more widely a currency is used, the more costly it becomes for individual actors to exit that system. Trade contracts, financial markets, payment infrastructure, and legal frameworks are deeply embedded in dollar usage, creating high switching costs even for states that are politically dissatisfied with US policy.

This logic remains intact in 2025. A Goldman Sachs analysis reveals that despite rising interest in alternatives, no other currency currently combines scale, liquidity, legal protections, and institutional trust in a way that rivals the dollar. Even periods of heightened political tension, including Russia’s invasion of Ukraine and subsequent sanctions, have not produced rapid or systemic shifts in global currency use. Instead, changes have been incremental and uneven.

Sanctions and political risk

Where McDowell’s work adds particular value is in explaining how financial sanctions introduce political risk into dollar usage without necessarily dismantling the system. In his highly regarded book, Bucking the Buck: US Financial Sanctions and the International Backlash Against the Dollar (2023), he shows that the growing use of US financial sanctions increases incentives for targeted states, and sometimes sanction-exposed states, to hedge against future vulnerability. These responses include reserve diversification, increased gold holdings, non-dollar trade settlement, and exploration of alternative payment mechanisms.

Crucially, these behaviours should not be interpreted as evidence of imminent dollar decline. Rather, they reflect risk management strategies by a subset of states operating under political constraints. Even in cases where de-dollarisation efforts are visible, such as Russia, outcomes have been partial and often costly. Other cases, including Turkey and Venezuela, demonstrate how difficult it is to sustain non-dollar financial arrangements at scale.

As Dr McDowell notes in the episode, freezing of Russian central bank assets in 2022 marked a significant escalation in the use of financial power, but it was not unprecedented. Previous reserve freezes, including those involving Libya, Iran, and Venezuela, had already signalled to some governments that dollar-based assets are not politically neutral. What changed after 2022 was the visibility and scale of these measures, which intensified debate among policymakers and analysts about long-term implications.

Digital currencies and payment systems

Another frequently cited challenge to dollar dominance is the rise of digital currencies and alternative payment networks. Central bank digital currencies, regional settlement systems, and blockchain-based technologies are often presented as tools to bypass US-controlled infrastructure.

McDowell’s analysis urges caution here. Most CBDC projects to date are focused on domestic retail payments, not cross-border settlement. Where wholesale or cross-border experiments exist, they remain limited in scope and maturity. The distinction between retail and wholesale CBDCs is critical, yet often lost in public debate.

From a geopolitical perspective, interest in these technologies is less about efficiency alone and more about strategic autonomy. For states concerned about sanctions exposure, digital infrastructure offers a potential hedge. But at present, these systems do not pose a serious challenge to the dollar’s role in global finance. They coexist with, rather than replace, existing networks.

The politics of reserve currency status

A further layer of uncertainty arises from US domestic politics. Dr McDowell’s Atlantic Council analysis published in 2025 highlights growing debate within the United States about whether reserve currency status remains an “exorbitant privilege” or has become an “exorbitant burden” due to trade imbalances, currency strength, and domestic political pressures.

Related discussions around a hypothetical “Mar-a-Lago Accord” underscore that dollar dominance ultimately rests on policy choices, not immutable economic laws. Confidence in the dollar depends on predictable governance, rule of law, and institutional credibility. While there is no evidence that the United States is actively seeking to dismantle its reserve currency role, rhetorical and policy signals matter for long-term perceptions.

McDowell’s work consistently emphasises that erosion of confidence would be gradual, not sudden. Structural change in international finance unfolds over decades, not electoral cycles. Even so, sustained political volatility or deliberate policy shifts could widen space for alternatives over time.

Continuity, with constraints

Taken together, the evidence points to a system under strain, but not in collapse. The dollar remains dominant because no viable substitute exists. At the same time, the expanded use of sanctions, technological experimentation, and geopolitical rivalry have introduced new constraints on US monetary power.

For governments and businesses, the implication is not to prepare for a post-dollar world, but to understand how political risk increasingly shapes financial exposure. Hedging behaviour, diversification, and fragmented payment arrangements are likely to grow at the margins, even as the core of the system remains intact.

As Dr McDowell’s research makes clear, the key question is not whether the dollar will disappear, but how the United States manages the power that dollar dominance confers, and how others respond to that power over time.