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Could US stop Ecuador using dollars in row over Snowden asylum? Could US stop Ecuador using dollars in row over Snowden asylum?
(about 11 hours later)
The United States may be the world's most powerful nation, but the prospects of the White House curbing the use of dollars in countries that might shelter Edward Snowden are fraught with complications.The United States may be the world's most powerful nation, but the prospects of the White House curbing the use of dollars in countries that might shelter Edward Snowden are fraught with complications.
The US dollar is widely used in Latin America, where it has traditionally been seen as a more reliable guard against inflation than local currencies. Ecuador adopted the US dollar as its official currency in 2000, after the 118-year-old sucre lost credibility amid rampant inflation. Bolivia uses the Boliviano, but the greenback also percolates through the economy.The US dollar is widely used in Latin America, where it has traditionally been seen as a more reliable guard against inflation than local currencies. Ecuador adopted the US dollar as its official currency in 2000, after the 118-year-old sucre lost credibility amid rampant inflation. Bolivia uses the Boliviano, but the greenback also percolates through the economy.
Although the US's options are limited, it could block Ecuador's use of the dollar by restricting imports and "cripple" the small Latin American economy, according to Jane Foley, senior currency strategist at Rabobank. Imports funnel the US currency back to Ecuador through American consumers and businesses paying for Ecuadorian products – mainly bananas, shrimps and oil – in dollars. Although the US's options are limited, it could block Ecuador's use of the dollar by restricting imports and damage the small Latin American economy, according to Jane Foley, senior currency strategist at Rabobank. Imports funnel the US currency back to Ecuador through American consumers and businesses paying for Ecuadorian products – mainly bananas, shrimps and oil – in dollars.
"If the US wanted to cut off the supply of US dollars to Ecuador they could only realistically do this by cutting imports from the country or by banning individuals from taking US dollars from the US to Ecuador," Foley said. "This would not completely starve Ecuador of dollars … but the blocking of imports from Ecuador by the US could cripple parts of its small economy.""If the US wanted to cut off the supply of US dollars to Ecuador they could only realistically do this by cutting imports from the country or by banning individuals from taking US dollars from the US to Ecuador," Foley said. "This would not completely starve Ecuador of dollars … but the blocking of imports from Ecuador by the US could cripple parts of its small economy."
Stopping unofficial use, in Bolivia, would be a tall order. "The US trying to prevent [the use of dollars] would be quite difficult because how could they be sure people in Bolivia are not using it under the radar," she said. "It would be extremely difficult for the US to police. Unless they could put in place a disincentive for the national government it would be very difficult to do." Stopping unofficial use, in Bolivia, would be a tall order. "The US trying to prevent [the use of dollars] would be quite difficult because how could they be sure people in Bolivia are not using it under the radar?" she said. "It would be extremely difficult for the US to police. Unless they could put in place a disincentive for the national government it would be very difficult to do."
Foley added that trade threats could be one option, but "it is not something they would do lightly because of the implications. They could be opening fresh cans of worms."Foley added that trade threats could be one option, but "it is not something they would do lightly because of the implications. They could be opening fresh cans of worms."
In recent years, several Latin American countries, including Venezuela and Nicaragua, have pledged to reduce their use of the dollar, although efforts to launch an alternative currency have yet to take off.In recent years, several Latin American countries, including Venezuela and Nicaragua, have pledged to reduce their use of the dollar, although efforts to launch an alternative currency have yet to take off.
In the past, the US has taken a studiously neutral view on other countries using its currency, known as dollarisation, although some economists fear it leaves the US Federal Reserve vulnerable to lobbying from other countries to change course on monetary policy. In the past, the US has taken a studiously neutral view on other countries using its currency, known as dollarisation, although some economists fear it leaves the US Federal Reserve vulnerable to lobbying from other countries to change course on monetary policy.