Will sanctions create a backlash against the dollar?

This is an audio transcript of the FT News Briefing podcast episode: Will sanctions create a backlash against the dollar?

Marc Filippino
Good morning from the Financial Times. Today is Friday, April 8th, and this is your FT News Briefing.

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French financial markets have been a bit wonky in the lead-up to Sunday’s big election. One of Russia’s biggest companies is calling for an impartial investigation into reports of atrocities in Ukraine. Plus, western sanctions against Russia have frozen Moscow’s ability to access US dollars. And there’s never been anything like it.

Katie Martin
It’s only really over the past couple of days and weeks that people have started to chew over what are the long-term ramifications of this.

Marc Filippino
One possibility is a backlash against the dollar. The FT’s Katie Martin explains why. I’m Marc Filippino, and here’s the news you need to start your day.

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This Sunday, French voters will cast ballots in the first round of a presidential election. President Emmanuel Macron is seeking a second term, and he’s in the lead, but polls have shown a steady rise in support for his biggest rival, far-right candidate Marine Le Pen. And this week, France’s financial markets, well, they got nervous. Bank shares, for one, had a sharp fall. Here’s the FT’s Paris correspondent, Sarah White.

Sarah White
Banks have reacted in particular, partly because, you know, they’re a bit of a proxy for political risk in the economy, just very broadly exposed to the French economy, and so they’ll tend to be the kind of first port of call as an expression of political risk. I think one of the concerns about a Marine Le Pen win would be that it could affect co-ordination around Europe’s response to the war in Ukraine, to its plan to put together an economic package to combat that.

Marc Filippino
And did this also affect bonds, Sarah? We saw a French government debt weaken this week.

Sarah White
I think it’s a similar situation with bond yields. I mean, we’ve seen a lot more alarmism about bond yields five years ago. In that scenario, that was particularly because Le Pen was campaigning on a platform of wanting to, France to leave the euro at the time. So we saw spreads between France and Germany, for example, really widened at that stage. We’re not quite in the same territory now. You know, Le Pen’s programme no longer includes that, and she’s focused a lot of her campaign on internal issues, around the cost of living in France, for example. But still, I think the fact that the possibility of a Le Pen win has really focused minds in the last few days, so we have seen bonds react as a result. And again, I think it’s a similar concern over a broader European unity, European co-ordination, what it would mean for the eurozone if Le Pen wins.

Marc Filippino
Sarah White is the FT’s Paris correspondent.

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The big global aluminium producer, Rusal, is the first Russian company to call for an investigation into the alleged war crimes in Ukraine. Reports of a massacre in the city of Bucha came to light after Russian troops withdrew from Kyiv. Rusal’s chair, who’s Dutch, said on the company’s website that the report should be investigated. Rusal is the world’s biggest aluminium producer outside of China. It’s been one of the hardest hit by sanctions, which have cut off its access to raw materials.

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Now, the sanctions that western nations and its allies have levied on Russia have been unprecedented, and they’re powerful because they’re based on the US dollar. It’s the most widely used currency in global financial markets, trade and central banks. But the dollar’s dominance has eroded over the past few decades. And there’s some speculation that the sanctions against Russia could speed up that process. To talk more about how this might happen, I’m joined by the FT’s markets editor Katie Martin. Hey, Katie.

Katie Martin
Hey, how are you doing?

Marc Filippino
I’m doing well. So, Katie, what happens if central banks decide to hold fewer dollars?

Katie Martin
Well, this is the big topic of the day, right? So, you know, when the Ukraine invasion happened and these sanctions came through very quickly, it was really quite a shock-and-awe moment because the US did something it’s never really done before and sanctioned the Russian central bank and said, sure, we know you’ve got all those dollars. Guess what? You can’t spend them. And this totally changes the game for how central banks all over the world think about putting dollars in their rainy day funds. And it’s only really over the past couple of days and weeks that people have started to really, you know, chew over what are the long-term ramifications of this. The answer is that we don’t quite know yet, but it certainly feels like a massive moment.

Marc Filippino
And one of the things that a lot of economists are talking about are whether other currencies stand to gain from this. You know, what’s the thinking there?

Katie Martin
So the idea is that if you or, you know, like Russia, a regime that’s kind of prickly towards the US, then if you feel like you might get the Russian central bank treatment and have your dollars frozen, it would make more sense to put your official reserves in other currencies. Now, there’s a few reasons why the US probably doesn’t need to panic. One of them is that the US is not acting alone here. So to the extent that Russia might want to switch their reserves around, then their opportunities in terms of finding currencies that have that global heft is going to be somewhat limited. The question now is, if it’s become, you know, accepted that currencies can be, you know, financial weapon of mass destruction, then where do you go if you are a central bank that is not particularly friendly to the US? The data from the IMF so far shows that the money that’s been coming out of the dollar has been trickling into smaller currencies but also notably China. And so one of the theories kicking around out there is that what’s happened with Russia could accelerate the process towards the Chinese renminbi becoming a big international currency that plays a major role in international trade and investment and in official reserves.

Marc Filippino
But I got to be honest with you, Katie, this feels a little bit like the boy who cried wolf?

Katie Martin
Yeah.

Marc Filippino
Right? In the sense that there’s been instances in the past where people have said this is going to be the end of the dollar’s dominance . . . 

Katie Martin
Yeah.

Marc Filippino
And it hasn’t happened.

Katie Martin
Yeah. This has been a theme that’s kicked around for a really long time. There is a strong sense of inertia. So once a certain kind of type of trade happens in dollars or whatever, it tends to stick in dollars. It’s quite difficult to change that around. The other thing is that if you were worried about the dollar being used as a weapon and you think that the renminbi is a safer place to be, then that might be a faulty way of thinking about it. Because China is all about arbitrary, unpredictable decision-making. So you might have more of a problem on your hands if you switch all of your reserves into China. So people haven’t properly got their heads around how this is going to affect the global financial system over the coming decades. But the certainty, if there is one, is that it will.

Marc Filippino
Katie Martin is the FT’s markets editor.

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Before we go, the US Senate yesterday confirmed Ketanji Brown Jackson for a seat on the US Supreme Court. She’ll be the court’s first black female justice. Her confirmation is also historic because Jackson will be the first justice who’s worked as a public defender. That’s an attorney assigned to represent defendants who typically can’t afford a lawyer.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Fiona Symon and me, Marc Filippino. Our editor is Jess Smyth. We had help this week from Joanna Kao, Maia MacDonald, David da Silva, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.