Janet Yellen: Anticipate a gradual decrease in the dominance of the US dollar

During a Housing Financial Services Committee, Treasury Secretary Janet Yellen addressed concerns about the decline of the US dollar's share of global reserves and the potential for de-dollarization. Yellen emphasized that while the dollar's share may gradually decrease, no viable alternatives could completely replace it.

Responding to a question by Rep. Warren Davidson of Ohio regarding the impact of US sanctions on dollar transactions, Yellen acknowledged that some countries have sought currency alternatives due to the use of sanctions. However, she emphasized that the dollar's role in the global financial system is unique and cannot be replicated by any other country, including China. Factors such as deep and liquid financial markets, a strong rule of law, and the absence of capital controls contribute to the dollar's position.

When Rep. Vicente Gonzalez of Texas inquired about the possibility of reducing the use of sanctions, Yellen stated that there are virtually no meaningful workarounds for most countries to replace the dollar as a reserve currency. She highlighted that the dollar remains the dominant reserve asset despite a growing diversification trend in reserve holdings as countries naturally seek to diversify their assets in a growing global economy.

Eurizon SLJ Asset Management, in a report from April, noted a gradual erosion of the US dollar's reserve status over the past two decades, with a significant decline in 2022. However, the dollar's strength in international trade remains unchallenged. Some reports suggest an increase in foreign central banks' demand for gold as an alternative to reduce reliance on dollar reserves.

Yellen also expressed concern about the impact of the US debt ceiling crisis on the dollar's reputation. She emphasized that such a crisis undermines global confidence in the US's ability to meet its debt obligations, which can further deteriorate the standing of the greenback.