US Treasury admits sanctions threaten dollar hegemony

Many countries are choosing alternative payment instruments and boosting non-dollar holdings within reserve assets, Janet Yellen acknowledged

US sanctions are pushing many countries to seek alternatives to the dollar for settlements, Treasury Secretary Janet Yellen admitted during her annual appearance on Tuesday before the House Financial Services Committee to discuss the state of the international financial system.

Asked about the risk of de-dollarization, Yellen acknowledged that the use of the dollar in the global economy is diminishing.

“It’s not surprising that countries that are fearing they can be affected by our sanctions are looking for alternatives to the dollar. It’s something that we simply have to expect,” she stated.

Asked by Congressman Vicente Gonzalez whether the US should lower the use of sanctions in its foreign policy given that even traditionally allied countries, such as France, have been making non-dollar transactions, Yellen stated that for most countries she sees “no meaningful workaround” to using the dollar. She acknowledged that there is a growing diversification away from the greenback within global reserve assets but stated her belief that the dollar is likely to retain its status as the dominant currency.

“We should expect over time a gradually increased share of other assets in reserve holdings of countries – a natural desire to diversify… 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… It will not be easy for any country to devise a way to get around the dollar,” Yellen stated. She noted that among the dollar’s major strengths are “deep liquid open financial markets, strong rule of law and an absence of capital controls,” which, according to Yellen, “no country is able to replicate.”

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Washington’s widespread use of sanctions has driven an increasing number of countries to start moving away from the greenback in trade settlements over the past year. For instance, Ukraine-related sanctions on Russia, which froze half of its reserves and limited the ability of Russian banks to conduct transactions via the SWIFT messaging system, forced Moscow to switch to national currencies in settlements with foreign partners.

China, which has been battling with Washington over export controls, has also boosted the share of yuan in trade settlements. Nearly all of the energy trade between Russia and China is currently conducted in yuan, while China’s national oil company CNOOC recently completed its first yuan-settled LNG trade with France’s TotalEnergies.

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