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The Weaponization of Finance: Implications for Global Trade and Emerging Economies

2024-10-25 01:40:12.011000

The US dollar's dominance in global trade and finance has increasingly been viewed as a double-edged sword, particularly for emerging market and developing economies (EMDEs). US Treasury Secretary John Connally's assertion that 'the dollar is our currency, but it’s your problem' resonates more today as the Federal Reserve's tightening cycle has led to significant capital outflows from EMDEs, exacerbating currency volatility and increasing debt-servicing costs [7e62ba49].

Recent discussions have highlighted the harmful impact of the weaponization of finance, particularly by the US and EU. Fedor Voytolovskiy warned that such economic warfare could destabilize the global economy, with specific reference to the $300 billion in Russian reserves that have been frozen as a form of financial leverage [5269a3ea]. This situation raises concerns about the potential fragmentation of the global monetary system, as trade wars lead to harmful decoupling between nations.

In response to these challenges, emerging economies are urged to promote a more equitable global order. China has positioned itself as a supporter of multilateral institutions and has seen its GDP surpass that of the US in purchasing power parity, highlighting the growing influence of non-G7 economies [5269a3ea]. Additionally, Bert Hofman praised China's Belt and Road Initiative for its role in aiding low-income countries, while Mwangi Wachira emphasized Africa's critical role in reforming the global order [5269a3ea].

Meanwhile, Japan's intervention in foreign exchange markets to stabilize the yen has underscored the broader implications of currency fluctuations. The yen has lost a third of its value since 2021, leading to increased costs for industries and importers while boosting tourism and exports to the US. This situation has prompted the US Treasury to monitor Japan for potentially unfair foreign exchange practices [7e62ba49].

The current period of policy divergence among major central banks emphasizes the dollar's significant global impact, further complicating the economic landscape for EMDEs [7e62ba49].

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