US sanctions are forcing other countries to look for alternatives to the US dollar.
Although aversion to the dollar is growing, it remains the dominant world trading currency.
US Treasury Secretary Janet Yellen believes it is reasonable for countries to look for alternatives to the US dollar given current geopolitical developments. Yellen was speaking at the State of the International Financial System meeting as part of the annual Treasury Secretary’s Hearing. She said US sanctions could prompt other countries to look for dollar alternatives, although it would be laborious.
Yellen conceded to Texas Rep. Vicente Gonzalez that current US sanctions could trigger paranoia in other countries and US foreign policy is forcing them to develop contingency plans for the economy.
“True, when we impose sanctions, countries that fear being targeted by those sanctions will be motivated to look for means other than the dollar to do business. This is something we have to accept. It is much more difficult to find other tools to make payments in other currencies when we work with partners.
But I would say that for most countries there is practically no viable alternative to using the dollar as a trading currency.”
The US Treasury Secretary notes that other countries are diversifying their currency reserves to become less dependent on the dollar. However, she also says that is what is expected of a growing world. Yellen thinks the US should expect a gradual increase in the share of other currencies in other countries’ reserve accounts. Nevertheless, the dollar is the dominant reserve currency:
“Holdings of other foreign exchange reserves have increased somewhat, but that is to be expected in a growing world, in an economy where countries are looking to diversify… We should expect a gradual increase in the share of other currencies in countries’ foreign exchange reserves. It’s a natural desire to diversify, but the dollar is by far the dominant reserve currency.”
Move away from the dollar
Yellen’s comments are in line with the global move away from the dollar. The US dollar has been the world reserve currency for over 100 years, since it replaced the British pound in 1931. The dollar is used by central banks to pay off international debt and conduct international transactions.
However, the dollar’s dominance of global reserves has declined from 70% to 60% over the past 20 years, according to reports from the International Monetary Fund. But the decline has accelerated since 2022, when the US and its allies froze Russian dollar reserves following Russia’s invasion of Ukraine.
Since last year, more countries are actively looking for dollar alternatives, and some are discussing creating a new global currency and increasing their gold reserves.
There’s also the not unrealistic possibility that Bitcoin, the world’s most widely used cryptocurrency, could benefit from this move away from the dollar.
Picture Copyright: dimand27
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