The US should expect the dollar’s share of global reserves to slowly decline, but no alternatives exist that could completely displace the greenback, Treasury Secretary Janet Yellen said on Tuesday.
Her comments came during a Housing Financial Services Committee in response questions about the risk of de-dollarization.
Asked by Rep. Warren Davidson, R-Ohio, on whether US sanctions could impact dollar transactions, Yellen acknowledged that their use has motivated some countries to look for currency alternatives.
“But the dollar plays the role it does in the world financial system for very good reasons that no other country is able to replicate, including China,” she said. “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. It will not be easy for any country to devise a way to get around the dollar.”
Later, Rep. Vicente Gonzalez, D-Texas, further inquired whether the US should slow down the use of sanctions, noting that even traditionally allied nations, such as France, had recently made non-dollar transactions.
“I would say there is virtually no meaningful workaround for most countries for using the dollar as a reserve currency,” Yellen replied.
Asked whether the dollar’s international status is diminishing, she noted growing diversification within reserve assets, something that can be anticipated in a growing global economy.
“We should expect over time a gradually increased share of other assets in reserve holdings of countries — a natural desire to diversify,” she said. “But the dollar is far and away the dominant reserve asset.”
The US dollar’s reserve status has seen gradual erosion for two decades, and it saw a steep decline in 2022 even though its strength in international trade remains unchallenged, Eurizon SLJ Asset Management said in April.
Other reports have pointed toward an upsurge in foreign central banks’ demand for gold as another way to reduce their reliance on dollar reserves.
But US lawmakers aren’t helping the dollar’s cause, Yellen suggested. Earlier in the hearing, she reiterated her long-standing concern over the US debt ceiling crisis, saying it undermines global faith in the nation’s ability to meet its debt obligations, deteriorating the greenback’s reputation.
