Janet Yellen Warns De-Dollarization Efforts Will Grow as Countries Seek Currency Alternatives

U.S. Secretary of the Treasury Janet Yellen delivers remarks at Johns Hopkins University’s School of Advanced International Studies (SAIS) in Washington on April 20, 2023. (Anna Moneymaker/Getty Images)

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.

China completed its first acquisition of liquefied natural gas (LNG) in the yuan in March. The transaction was done between France’s TotalEnergies and China National Offshore Oil Corp., with 65,000 tons of LNG sourced from the United Arab Emirates.

U.S. dollar banknote in this illustration taken on July 17, 2022. (Dado Ruvic/Reuters)

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.”

According to the International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) data, the U.S. dollar still accounted for about 58 percent of forex reserves at the end of 2022. The next closest was the euro, representing approximately one-fifth.

In the latest de-dollarization saga, Reuters reported on June 12 that Pakistan paid for discounted Russian crude oil in the Chinese yuan. This was the country’s first government-to-government transaction with Moscow, representing 100,000 tons, with 45,000 tons arriving at the Karachi port this week.

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.”

“In our view, de-dollarization poses little risk of changing the global currency order in the foreseeable future, but we also acknowledge that it may be a part of a decades-long trend,” Candice Tse, the global head of strategic advisory solutions at Goldman Sachs, wrote in a note. “If anything, we expect less that a single new contender overtakes the U.S. dollar as the world’s reserve currency and more that multiple other currencies grow in reserve share, as has been the case for the last two decades. Until then, we believe de-dollarization will remain a popular headline but 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.

World Gold Council (WGC) data show that central banks bought more than 1,100 tons of the yellow metal in 2022, the largest net amount since 1950. This trend continued heading into 2023, as central bank gold reserves climbed an extra 52 tons in February.

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.

Gold bars at Korea Gold Exchange in Seoul, South Korea, on Aug. 6, 2020. (Kim Hong-Ji/Reuters)

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.

“That would further their ambition for introducing the yuan onto the world stage,” Billingslea said.

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.

According to Treasury data, China has been gradually offloading its holdings of Treasury securities over the past year, declining about 17 percent since January 2022.

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.