In 2022, the U.S. dollar experienced an 8% decrease in its share of global reserves, leading to questions about the future of its dominance. During a congressional hearing in June, Treasury Secretary Janet Yellen shared her perspective on the matter, stating that no other currency currently exists that could replace the greenback.

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The imposition of U.S. sanctions and foreign policy decisions has sparked a response from countries like China, Russia, and others who seem eager to challenge the dollar’s supremacy. Yellen, while resolute in her belief that “it will not be easy for any country to devise a way to get around the dollar,” also cautioned that the dollar’s portion of global reserves may continue to decline as countries seek diversification.

So, why is de-dollarization a prominent topic today, and what steps can you take if you’re concerned about the strength of the dollar?

Impact of U.S. Sanctions:
The U.S. dollar’s dominance in global trade and finance has persisted for about 80 years, not only because the U.S. boasts the world’s largest economy but also because commodities, including oil, are priced in dollars. Recent events such as the Federal Reserve’s aggressive rate hikes to combat inflation, trade tensions with China, and sanctions following Russia’s Ukraine invasion have led more countries to explore alternatives to the dollar for international transactions.

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Countries like India and the United Arab Emirates (UAE) have initiated trade in their local currencies, bypassing the dollar. For instance, Indian Oil Corp. recently purchased one million barrels of oil from the Abu Dhabi National Oil Company using the Indian rupee instead of the greenback. At the 14th BRICS Summit, Russian President Vladimir Putin announced measures to establish a new “international currency standard.” Meanwhile, China has been advocating for the use of the yuan for payments by oil producers and major exporters. Even traditional allies like France have turned to non-dollar transactions in response to increased U.S. sanctions.

When questioned about the consequences of these developments before the House Financial Services Committee, Yellen acknowledged that U.S. sanctions had prompted some countries to explore alternative currencies but emphasized that the greenback’s dominance remains secure.

Yellen explained, “The dollar plays its role in the world financial system for compelling reasons that no other country can replicate, including China. We have deep, liquid, open financial markets, a strong rule of law, and an absence of capital controls that no other country can match.”

The Dollar as a Reserve Currency:
Regarding the dollar’s international status, Yellen asserted that there is “virtually no meaningful alternative for most countries to using the dollar as a reserve currency.” She anticipates that, over time, other assets may gradually comprise a larger share of countries’ reserve holdings as they seek diversification. However, the dollar maintains a significant lead as the dominant reserve asset.

According to data from the IMF’s Currency Composition of Foreign Exchange Reserves (COFER), the U.S. dollar constituted 58.36% of global foreign exchange reserves in the last quarter of the previous year. The euro came in second, making up approximately 20.5% of reserves. In contrast, the Chinese yuan, often considered a contender to the dollar, represented just 2.7% of reserves in the same period, with a significant portion held by Russia.

While de-dollarization efforts are underway, many financial experts share Yellen’s view that the dollar will retain its supremacy for the foreseeable future. Eurizon SLJ Asset Management strategists acknowledged the notable decline in the dollar’s market share in 2022 due to sanctions but predicted that “the dollar will likely continue to enjoy dominance as an international currency for a while longer.” Fitch Solutions also does not foresee a “paradigm shift” occurring in the near term, given the absence of a feasible alternative for international trade.

Concerned About a Decline in the USD?
Whether or not the dollar can be replaced, you may have concerns about how economic volatility, high inflation, and uncertainty in the stock market could affect your own dollars, particularly your retirement savings.

One option to consider is looking to foreign central banks for inspiration. Over the past year, central banks worldwide have been reducing their dollar reserves in favor of gold. In the first quarter of this year, central banks added a record-breaking 228.4 tons of gold to their reserves, according to the World Gold Council. Gold can be an attractive alternative since, unlike the U.S. dollar, which has lost 98% of its purchasing power since 1971, gold’s purchasing power remains relatively stable over time.

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