The U.S. dollar’s international status as the chief reserve currency is slowly diminishing as other countries diversify their assets, warns Treasury Secretary Janet Yellen.
During a Housing Financial Services Committee on June 13, multiple Republican and Democratic lawmakers lobbed questions surrounding the risk of the worldwide de-dollarization campaign that has accelerated over the past year.
Yellen insisted that while the greenback’s share of international reserves will gradually decline, no legitimate alternatives in today’s global marketplace could displace the dollar.
When asked by Rep. Warren Davidson (R-Ohio) if U.S. sanctions could threaten dollar supremacy in global transactions, Yellen conceded that these economic and financial penalties are contributing factors for the growing number of countries searching for dollar substitutes. At the same time, “no country is able to replicate” the dollar’s role in the global financial system. This, she noted, includes China.
“And that is we have deep liquid open financial markets, strong rule of law and an absence of capital controls that no country is able to replicate,” Yellen told the House panel. “It will not be easy for any country to devise a way to get around the dollar.”
Yellen also dismissed the assertion that perhaps the federal government should reconsider or reduce the use of sanctions. Rep. Vicente Gonzalez (D-Texas) alluded to the various allied nations, like France, participating in non-dollar transactions.
“I would say there is virtually no meaningful workaround for most countries for using the dollar as a reserve currency,” the former head of the Federal Reserve said.
Ultimately, Washington should anticipate the dollar supremacy to dissipate incrementally in the future.
“We should expect over time a gradually increased share of other assets in reserve holdings of countries—a natural desire to diversify,” Yellen stated. “But the dollar is far and away the dominant reserve asset.”
Pakistan is presently grappling with an economic collapse.
This is in addition to the various anti-dollar-related developments in the last year. Earlier this year, Brazil and China announced a new agreement to settle trade in yuan and real. In 2022, China and Saudi Arabia reportedly negotiated to settle Chinese crude sales in the yuan.
Despite the headlines, Goldman Sachs thinks the dollar king being dethroned is an “unlikely story.”
Gold and the Yuan
In the last several years, Beijing’s objective has been to internationalize the yuan and reduce dependence on the dollar.While the yuan has become more prevalent in cross-border transactions, the yuan only accounts for 7 percent of worldwide FX trading volume, compared to the dollar’s roughly 80 percent. Moreover, the yuan represented 2.3 percent of SWIFT (Society for Worldwide Interbank Financial Telecommunication) payments. By comparison, the dollar and the euro accounted for 43 percent and 32 percent, respectively.
At the same time, another asset is beginning to threaten the dollar hegemony: gold.
China has been one of the leaders in international gold-buying sprees and has accumulated a substantial war chest. It is unclear how much gold Beijing has in its possession because many large mining companies are state-owned.
Marshall Billingslea, a senior fellow at the Hudson Institute, suspects that the nation’s total gold holdings are much higher than official numbers suggest. If China does maintain larger gold reserves than what international estimates show, then the main risk is that “they could start issuing gold-denominated, gold-backed yuan contracts,” he told House Subcommittee on National Security, Illicit Finance, and International Financial Institutions on June 7.
China’s US Debt Holdings
At one point during the House Financial Services Committee hearing, Yellen was instructed to have the Treasury Department and the Federal Reserve begin to prepare for a potential scenario where China dumps its $859 billion of U.S. government bonds.Yellen acknowledged that the U.S. is currently “not engaging in specific exercises to address such a risk.”
“I would encourage treasury to make preparations and be on the ready for that scenario,” Rep. Andy Barr (R-Ky.) said.
Until recently, China had been the world’s largest holder of U.S. debt. Japan is now the top, although its holdings have also decreased, tumbling about 15 percent to $1.104 trillion.