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

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

According to a report in the UK's Financial Times on Monday, officials from government departments including the Treasury Department and the White House met this summer with Johns Hopkins University professor and dollarization expert Steve Hanke to discuss how the government could advance 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."

Latin American countries are seen as the preferred targets for dollarization. Some policymakers and economists believe that Argentina, because of frequent devaluation of the peso, has become the main candidate for dollarization, even though both the US and Argentine governments have stated they are not actively considering this at present. In addition, Lebanon, Pakistan, Ghana, Turkey, Egypt, Venezuela, and Zimbabwe are also listed as potential targets.

Discussions about dollarization coincide with the US involvement in responding to Argentina's market crisis, and the US Treasury recently provided $20 billion in financial aid to Argentina, a timing that has led to increased attention to the US's strategic intentions to promote dollarization.

US Government Leaders Promote Dollarization Strategy

The Trump administration's interest in dollarization stems from concerns over emerging markets’ decreased use of the US dollar. Hanke revealed that a "political figure" connected to the White House explicitly expressed these concerns at a meeting in late August.

"This political figure made it clear that there is a group among the high-level officials who are interested in strengthening the international role of the dollar," Hanke said, adding that the dollarization policy and the government's promotion of US dollar-backed stablecoins for broader use "fall within the same domain." He added, "The top officials have requested a thorough study of all related issues, which is why I am involved."

Hanke had two in-person meetings with government officials in mid and late August respectively. 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 also attended by Treasury 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 "Focus Case"

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

Earlier this month, Argentina's Economy Minister Luis Caputo ruled out the possibility of dollarization in the short term, saying the country does not have enough dollar reserves to achieve that goal, but did not completely reject the idea.

Jay Newman, a key figure in the hedge fund Elliott Management’s dispute over Argentine debt, said: "If you want to break this cycle, you have to do it. Otherwise, every time you pump dollars into the economy, they get sucked away by the oligarchs and everyone with offshore bank accounts."

Small Latin American economies such as Ecuador and El Salvador have already adopted the US dollar. However, the International Monetary Fund believes dollarization would force Argentina to use the Federal Reserve's monetary policy, leading to low growth. Many holders of Argentine dollar bonds believe formal dollarization is a distant prospect, as it would require a large increase in already depleted dollar reserves as backing.

Policy Outlook for Argentina After Market Stabilization

Argentina fell into crisis last month, when Milei's party suffered an electoral defeat in regional elections, triggering a run on the peso and threatening the country's fragile macroeconomic stability. The turmoil largely subsided after the government achieved a sweeping victory in last month's national legislative elections.

With the market stabilizing after Milei’s victory, investors expect the Argentine government will eventually, with support from the US and IMF, shift the peso from an official dollar exchange rate "band" to greater flexibility. Bondholders worry that maintaining the peso within a trading band keeps the currency too strong, reducing inflation but preventing the influx of dollars needed to rebuild reserves.

Hanke believes that since 1995, 76% of Argentina's accumulated debt has vanished through capital flight due to long-term distrust of the peso. "All these bailouts are bad deals—if only a quarter of the debt stays and is invested in productive activities, it's far from enough to generate free cash flow to repay the debt," Hanke said. "The rates of return would have to be ridiculously high."

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