United States presidential candidate Donald Trump sees the continued dominance of the US dollar in international transactions as a matter of national security.

‘If we lost the dollar as the world currency, I think that would be the equivalent of losing a war,’ he told The Economic Club of New York earlier this month.

Trump has promised to impose 100 percent tariffs on imports from countries moving away from using the US dollar in their international transactions.  ‘You leave the dollar, you’re not doing business with the United States,’ he said.

How this would work is unclear. As Trump was talking, Saudi Arabian and Chinese officials were discussing the settlement of their bilateral trade in renminbi, as do others already, including Brazil and South Africa. The share of international trade settled in renminbi is still only 6 percent. It has risen from 2 percent since 2021, but this is mainly because western sanctions on Russia after its invasion of Ukraine have excluded Russian banks from the global payments network, Swift, which is used to settle international bank transfers. This has forced Russia to look for alternatives to the US dollar to settle its payments.

According to analysis by Bloomberg Economics, about 40 percent of Russian exports and imports are now settled in renminbi. This includes some non-Chinese trade, with Russia using the renminbi because of its difficulty in sourcing other foreign currencies.

Washington derives both significant coercive power and economic advantage from the US dollar’s status as the preeminent global currency, however the currency’s use in trade finance—the financial instruments used to smooth trade transactions between importers and exporters—where it is responsible for about 54 percent of transactions, is a side-issue.

Trade finance is only 1 percent of the size of the foreign exchange market, which turns over US$7.5 trillion every day. But the US dollar is on one side of 88 percent of all foreign exchange transactions. It is this role as the essential component of international transactions that gives the US government the power to impose financial sanctions on international financial institutions, including other central banks.

A bank that loses access to the US dollar market has its international operations strangled.  Bloomberg’s analysis shows that Russian access to the renminbi is starting to dry up because Chinese banks are fearful of US sanctions.

There has been no change in the US dollar’s share of foreign exchange markets in the last 20 years, according to the Bank for International Settlements.

The US dollar achieved that indispensable role because the depth and liquidity of US capital markets make it safe and stable in a way that no other currency can match. Unlike China, the US has no controls on capital flows and any volume of US dollars can be transacted instantly without it affecting the price. This also allows the US to run huge budget and current account deficits without fear of financial market reaction. There is always demand for US dollars.

The one area where the US dollar is losing ground is as a reserve currency, where, according to the IMF, the currency’s share has declined from over 70 percent in 2000 to 58 percent now.

The decline in the US dollar share of international reserves reflects a global shift to non-traditional currencies, including the Australian and Canadian dollars, the South Korean won and the renminbi. The latest data shows the Australian dollar is slightly ahead of the renminbi, accounting for 2.2 percent of international reserves.

The seizure of the US dollar portion of Russia’s foreign exchange reserves in 2022, after its invasion of Ukraine, encouraged China to reduce the share of its reserves in US dollars, although the scope for it to diversify is limited by the lack of similarly sized alternatives.

While the US has demonstrated its ability to sequester other nations’ US dollar reserves, it is not a coercive threat with the same impact as the sanctioning of bank transactions in the currency. Foreign exchange reserves are held passively as insurance and have little influence on a nation’s international payments, other than in a crisis.

The exclusion of Russian banks from Swift has contributed to a jump in the US dollar share of transactions in the network from 42 percent at the beginning of 2022 to 59 percent now.  The big loser has been the euro: its share has plunged from 37 percent to just 13 percent.  That reflects the collapse of Europe’s oil and gas trade with Russia and the requirement to pay US dollars for the alternative supplies coming from the United States.

It suggests the US dollar’s dominant role is in no danger—and it doesn’t need threats from Trump to keep this status.