The recent decision by the Central Bank of Sudan to convert its dollar holdings to euros is the latest example of the growing politicization of international currency issues.
Beginning yesterday, the Central Bank of Sudan will no longer use the dollar and is switching its foreign currency reserve holdings to euros. The Central Bank's governor, Mohamed al-Hassan, announced last week that all Central Bank transactions would be made using euros and advised Sudanese banks to use alternate currencies to "lessen the risk of continuing to deal in the U.S. dollar." Much of Sudan's trade is with Middle Eastern and Asian partners and many companies already extensively use the euro.
Rising energy prices over the last five years have prompted a massive redistribution of wealth around the world. The IMF estimates that Sudan's economy grew by 12 percent last year, much of it fueled by oil revenues. At the same time, the dollar's place in international reserve holdings is shrinking, while that of other major currencies, such as the euro, is increasing.
America's burgeoning current account deficits in recent years are one of the most important manifestations of this process-the new geopolitics of energy intersecting with the changing structure of global finance and the subsequent decline in the value of the dollar. Further displacement of the dollar as the world's preferred reserve and transactional currency could significantly damage America's international position. And, the United States' growing dependence on foreign governments to finance its deficits creates a profound strategic vulnerability. This vulnerability could ultimately be exploited by foreign governments-including major energy producers such as Russia and major manufacturing powers such as China-to constrain American influence.
These trends are discussed more extensively in Flynt Leverett's essay in the current January/February 2008 issue of The National Interest, "Black is the New Green."