The United States seeks to expand "dollarization," with Latin America as the primary target, and Argentina at the forefront?

The Trump administration is exploring how to encourage more countries to adopt the US dollar as their primary currency in response to the global trend of de-dollarization. This policy discussion has entered a substantive phase, with multiple government departments involved and consultations with authoritative experts in the field of dollarization.

According to a report by the Financial Times on Monday, officials from government departments, including the Treasury Department and the White House, met this summer with Steve Hanke, a professor at Johns Hopkins University and an expert on dollarization, to discuss how the government could promote this policy. Hanke stated, "This is a policy they are taking very seriously, but it is still in progress, and no final decision has been made yet."

Latin American countries are seen as the preferred targets for dollarization. Some policymakers and economists believe that Argentina, due to the frequent devaluation of the peso, has become a major candidate for dollarization, although both the US and Argentine governments have stated that they are not actively considering this matter at present. Additionally, Lebanon, Pakistan, Ghana, Turkey, Egypt, Venezuela, and Zimbabwe are also listed as potential candidates.

The discussion on dollarization coincides with the US's involvement in addressing the market crisis in Argentina, as the US Treasury recently provided $20 billion in financial assistance to Argentina, raising external attention on the US's strategic intentions to promote dollarization.

US Government's Strong Push for Dollarization Strategy

The Trump administration's interest in dollarization policy stems from concerns about the reduced use of the dollar in emerging markets. Hanke revealed that a "political figure" connected to the White House explicitly expressed these concerns during a meeting in late August.

"This political figure made it clear that there is a group at the senior government level interested in enhancing the international role of the dollar," Hanke stated, adding that the dollarization policy and the government's push for broader use of dollar-backed stablecoins "belong to the same realm." He further noted, "The senior officials have requested a thorough study of all related issues, which is why I am involved."

Hanke had two face-to-face meetings with government officials in mid and late August. Senior officials from the President's Council of Economic Advisers, the National Economic Council, and the National Security Council attended both meetings, with the second meeting also including Treasury Department officials and White House political figures. White House spokesperson Kush Desai confirmed that officials met with Hanke but emphasized that the government has not made a formal decision on whether to encourage dollarization.

Argentina Becomes the "Focal Case"

Argentina has long been viewed as an ideal candidate for dollarization. The country implemented a "currency board" system pegged to the dollar from 1991 to 2002, but it collapsed after a disastrous debt default in 2001. Dollarization was a core promise of Javier Milei in the 2023 presidential campaign.

Earlier this month, Argentine Economy Minister Luis Caputo ruled out the possibility of implementing dollarization in the short term, stating that the country does not have enough dollar reserves to achieve this goal, but he did not completely dismiss the idea.

Hedge fund Elliott Management's key figure in the Argentine debt dispute, Jay Newman, stated, "If you want to break this cycle, you have to do it. Otherwise, every time you inject dollars into the economy, they will be siphoned off by the oligarchs and everyone who has offshore bank accounts." "Ecuador and El Salvador, among other small Latin American economies, have already adopted the US dollar. However, the International Monetary Fund believes that dollarization would force Argentina to adopt the monetary policy of the Federal Reserve, leading to low growth. Many holders of Argentine dollar bonds consider formal dollarization a distant prospect, as it would require a significant increase in the depleted dollar reserves to support it.

Policy Outlook for Argentina After Market Stabilization

Argentina fell into crisis last month, with the party of Milei suffering a significant defeat in regional elections, triggering a run on the peso and threatening the country's fragile macroeconomic stability. The turmoil has largely subsided following the government's overwhelming victory in last month's national legislative elections.

As the market stabilizes following Milei's victory, investors expect the Argentine government, with support from the US and the IMF, to shift the peso from its official exchange rate "band" against the dollar to greater flexibility. Bondholders are concerned that maintaining the peso within a trading band makes the currency too strong, which, while reducing inflation, comes at the cost of failing to attract dollars to rebuild reserves.

Hanke believes that 76% of the debt accumulated by Argentina since 1995 has disappeared due to capital flight stemming from long-term distrust of the peso. "All these bailouts are bad deals—if only a quarter of the debt remains and is invested in productive activities, it is far from enough to generate sufficient free cash flow to repay the debt," Hanke stated, "the return must be outrageously high."

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