Global Courant
‘A Natural Desire to Diversify’: Janet Yellen Says Americans Should Anticipate a Decline in the USD as the World’s Reserve Currency – What You Need to Know and How to Prepare
The US dollar saw its share of global reserves decline by 8% in 2022 – leading some to wonder whether the dollar’s days of dominance are over.
Treasury Secretary Jannet Yellen gave her two cents on the issue at a Congressional hearing in June – stating that there is currently no currency that could replace the dollar.
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US sanctions and foreign policy moves have prompted a response from China, Russia and other prominent countries that may be keen dethrone the dollar.
Yellen remains adamant that “it will not be easy for any country to figure out a way to bypass the dollar.” However, she warned that the dollar’s share of global reserves could continue to decline as countries try to “diversify.”
This is why the topic of de-dollarization is front and center today – and what you can do if you concerned about the strength of the dollar.
Impact of US sanctions
The dollar’s dominance in global trade and capital flows dates back at least 80 years – not only because the US is the world’s largest economy, but also because oil and other essential commodities are priced in dollars.
However, recent events – including the Fed’s aggressive rate hikes to stem domestic inflation, the trade war with China and US sanctions imposed following Russia’s invasion of Ukraine – have led more and more countries to call for trade in currencies other than the US. dollars.
Prominent superpowers India and the United Arab Emirates (UAE) have officially started trading with each other in their local currencies. The Indian government recently announced that the country’s largest oil refiner, Indian Oil Corp., used the local rupee to buy a million barrels of oil from the Abu Dhabi National Oil Company – and not the dollar.
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At the 14th BRICS Summit last year, Russian President Vladimir Putin announced measures to create a new ‘international currency standard’. Meanwhile, China has urged oil producers and major exporters to accept yuan as payment, and major oil exporter Saudi Arabia has said this is the case. “open” to the idea of trading other currencies.
Even old allies like France have conducted non-dollar transactions since the U.S. stepped up sanctions. In April, French President Emmanuel Macron said Europe must reduce its dependence on the US dollar to maintain its “strategic autonomy” and avoid becoming “vassals” (subordinated) to America.
When you are questioned about the impact of these trends before the House Financial Services CommitteeYellen admitted that US sanctions have motivated some countries to look for currency alternatives – but she was confident the dollar will remain dominant.
“The dollar plays the role it does in the global financial system for very good reasons that no other country can copy, including China,” she said. “We have deeply liquid open financial markets, a strong rule of law and a lack of capital controls that no country can replicate.”
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The dollar as a reserve currency
Asked whether the dollar’s international status is declining, Yellen said she sees “virtually no meaningful solution for most countries to using the dollar as a reserve currency.”
“We should expect a gradually increasing share of other assets in countries’ reserves over time – a natural desire to diversify. But the dollar is by far the dominant reserve asset.”
According to data from the IMF Currency composition of foreign exchange reserves (COFER), the US dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter of last year. In second place was the euro, accounting for around 20.5% of reserves.
Meanwhile, China’s yuan – which some believe poses the biggest threat to the dollar – accounted for just 2.7% of reserves during the same period and almost a third of them are held by Russia, according to a 2022 report. IMF paper.
While de-dollarization efforts are clearly underway, most financial commentators share Yellen’s view that the dollar will succeed in retaining its throne.
Eurizon SLJ Asset Management strategists published a note in April acknowledging the “exceptional” decline in the dollar’s market share in 2022 as a result of the sanctions imposed on Moscow by the US and its allies – but they added: “the dollar is likely to survive. to be able to enjoy dominance as an international currency for a while longer.”
Similarly, Fitch Solutions said it does not expect a “paradigm shift” anytime soon as there is no viable alternative to the US dollar for international trade.
Are you worried about the USD falling?
Whether the dollar is fungible or not, you may be concerned about how economic volatility, high inflation, and stock market uncertainty will impact your own dollars, especially your retirement fund.
Why don’t we look to foreign central banks for inspiration? Over the past year, central banks worldwide have set aside their dollar reserves in favor of gold.
In the first quarter of this year, central banks added 228.4 tons of gold – a new quarterly record – to their reserves, the report said. World Gold Council.
Gold is a great alternative because, unlike the US dollar, which has lost 98% of its purchasing power since 1971, the purchasing power of gold remains more stable over time.
You can get a piece of this gold action by opening a Gold IRA – a type of individual retirement account that allows you to invest in gold and other precious metals in physical forms, such as coins, instead of stocks, mutual funds and other traditional investments.
Choosing a Gold IRA gives you the opportunity to both diversify your portfolio and stabilize your finances – and gold typically carries less risk than other alternative investments.
If you want to open a Gold IRA, There are reputable services which will allow you to roll over your current 401(k) or IRA to this new account.
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This article provides information only and should not be construed as advice. It comes without any form of warranty.
