Officials in the Trump administration are currently exploring methods to encourage other nations to make the dollar their main currency as a way to counter China’s attempts to diminish its global influence.
Throughout the summer, representatives from various government departments, including the Treasury Department and the White House, engaged with Steve Hanke, a notable dollarization expert from Johns Hopkins University, to consider how to push this initiative forward.
Mr. Hanke mentioned to the Financial Times that “This is a policy that the government takes very seriously, but it is a work in progress. No final decision has been taken yet.”
In light of U.S. efforts to support Argentina amid its market troubles, discussions about dollarization have surfaced. Some policymakers see Latin America as a likely candidate for this shift, mainly due to ongoing issues with the peso’s reliability. However, both the U.S. and Argentina have stated that dollarization isn’t currently on the table.
There’s growing concern among officials about China’s influence on emerging markets to diminish dollar use in international trade.
During a late-August meeting, Hanke relayed worries expressed by a “political figure” tied to the White House regarding this issue. He explained that certain high-level groups were keen on bolstering the dollar’s global standing and that interest in dollarization was aligned with their broader strategy involving dollar-backed stablecoins.
A White House spokesperson confirmed the meetings with Hanke, but emphasized that no formal decisions regarding dollarization have been made yet. Press Secretary Khush Desai reiterated President Trump’s commitment to maintaining the dollar’s strength, stating that input from outside experts is regularly sought, but these discussions should not be misconstrued as formal policy.
These conversations kicked off in August, preceding the U.S. Treasury’s $20 billion financial aid package to Argentina. Hanke had advised officials that Argentina, alongside nations like Lebanon, Pakistan, and others, could be key candidates for support.
Argentina had a “currency board” linked to the dollar from 1991 until its collapse in 2002 spurred by a severe default.
Throughout mid to late August, Hanke held two meetings with senior officials from the U.S. President’s Council of Economic Advisers, the National Economic Council, and the National Security Council, which also included Treasury Department officials.
Hanke, who spends much of his career advising on dollarization, notes that the Argentine crisis hasn’t intensified the conversation surrounding this issue.
Many view dollarization as a possible answer to Argentina’s ongoing currency troubles. Javier Milei, a liberal candidate in the recent elections, had promised to pursue it. Recently, Argentina’s Economy Minister Luis Caputo dismissed dollarization as an immediate solution, citing insufficient dollar reserves, but didn’t completely shut down the idea.
Some, like Jay Newman from the hedge fund Elliott Management, argue that breaking the cycle of economic turmoil requires moving toward dollarization, or else money simply disappears into the pockets of wealthy elite with offshore accounts.
Other smaller Latin American countries, like Ecuador and El Salvador, already use the dollar. Yet, the IMF believes that embracing dollarization would force Argentina to adhere to U.S. monetary policy and could stifle economic growth.
Argentina has been rocked by a new crisis following an unexpected defeat for Milei’s party in local elections. This led to a significant peso decline and jeopardized economic stability, although things have calmed down since the government’s recent parliamentary election victory.
Bondholders in Argentina view formal dollarization as unlikely for now, particularly due to the need for a major boost in dwindling dollar reserves to back it.
Milei’s recent electoral win has stabilized market sentiments, with investors optimistic that his administration will eventually allow the peso to trade more flexibly against the dollar.
There are concerns among bondholders that the current strategy of keeping the peso within a trading range is overly strengthening it, limiting inflation and reducing dollar influx to restore foreign reserves.
Hanke estimates that a significant portion of Argentina’s debt since 1995 has evaporated due to capital flight stemming from persistent distrust in the peso.
“All of these bailouts are terrible deals. Even if only a quarter of the debt were left and invested in production, there wouldn’t be enough to generate sufficient free cash flow to service the debt,” Hanke remarked, emphasizing the need for more favorable rates of return.
