WASHINGTON (Dispatches) – The U.S. should expect the dollar’s share of global reserves to slowly decline, Treasury Secretary Janet Yellen has said.
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 U.S. sanctions could impact dollar transactions, Yellen acknowledged that their use has motivated some countries to look for currency alternatives.
Later, Rep. Vicente Gonzalez, D-Texas, further inquired whether the U.S. should slow down the use of sanctions, noting that even traditionally allied nations, such as France, had recently made non-dollar transactions.
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.
The U.S. 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 U.S. lawmakers aren’t helping the dollar’s cause, Yellen suggested. Earlier in the hearing, she reiterated her long-standing concern over the U.S. debt ceiling crisis, saying it undermines global faith in the nation’s ability to meet its debt obligations, deteriorating the greenback’s reputation.
On Sunday, Yellen said economic sanctions imposed on Russia and other countries by the United States put the dollar’s dominance at risk as targeted nations seek out an alternative.
“There is a risk when we use financial sanctions that are linked
 to the role of the dollar that over time it could undermine the hegemony of the dollar,” Yellen said on CNN.
“Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative,” she told the network’s Fareed Zakaria in an interview.
Yellen nevertheless signaled Washington’s addiction to sanctions, saying they are an “extremely important tool,” all the more so when used by the United States and its allies as “a coalition of partners acting together to impose these sanctions.”
Signs of de-dollarization are unfolding in the global economy, strategists at the biggest U.S. bank JPMorgan said last Monday.
The strains of steep U.S. interest rate rises and sanctions that have frozen Russia out of the global banking system have seen a fresh push by the “BRICS” nations, Brazil, Russia, India, China and South Africa, to challenge the dollar’s hegemony.
JPMorgan strategists Meera Chandan and Octavia Popescu said that while the greenback remains at the top of the pack, a closer look shows a more bifurcated picture.
Their assessment on the dollar is the most high profile by any large U.S. bank so far, although heavyweight money managers such as Goldman Sachs Asset Management have aired similar views.
In the FX reserves held by central banks around the world, for example, its share has declined to a record low of 58%.
Although that is still by far the largest share of any global currency, it drops further when accounting for gold, which now comprises 15% of reserves versus 11% five years ago.
“Some signs of de-dollarization are emerging,” JPMorgan’s analysts said, adding the trend was likely to persist even as the dollar maintains its “large footprint”.
Efforts by BRICS countries and other major commodity exporters to loosen the dollar’s stranglehold on global commerce have ramped up since the start of the war in Ukraine, which saw the U.S. freeze a large chunk of Russia’s foreign reserves.
Since then Saudi Arabia and China have begun talks to settle Chinese oil sales with the yuan, Brazil and China have announced the phase-in of a yuan clearing arrangement for some trade between the two countries while China and Russia are also now doing a significant portion of their trade in yuan.
China’s yuan now accounts for a record while the euro’s slice has shrunk 8 percentage points over the last decade of ultra low interest rates to 31%.