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Impact of U.S. sanctions

The dollar’s dominance in global trade and capital flows dates back at least 80 years — not just because the U.S. is the world’s largest economy, but also because oil and other essential commodities are priced in the greenback.

However, recent events — including the Fed’s aggressive rate hikes to stem domestic inflation, the trade war with China and the U.S. sanctions enforced after Russia’s invasion of Ukraine — have caused more countries to call for trade to be carried out in other currencies besides the U.S. dollar.

At the 14th BRICS Summit last year, Russian President Vladimir Putin announced measures to create a new “international currency standard.” Meanwhile, China has been urging oil producers and major exporters to accept yuan for payments, and major oil exporter Saudi Arabia has said it’s “open” to the idea of trading other currencies.

Even long-time allies, like France, have made non-dollar transactions since the U.S. ramped up its sanctions. In April, French President Emmanuel Macron said Europe must reduce its dependence on the U.S. dollar in order to keep its “strategic autonomy” and avoid becoming “vassals” (subordinate) to America.

When quizzed on the impact of these trends in front of the House Financial Services Committee, Yellen admitted that U.S. sanctions have motivated some countries to seek out currency alternatives — but she was adamant the greenback will remain dominant.

“The dollar plays the role it does in the world financial system for very good reasons that no other country is able to replicate, including China,” she said. “We have deep liquid open financial markets, strong rule of law and an absence of capital controls that no country is able to replicate.”

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The dollar as a reserve currency

When asked if the dollar’s international status is declining, Yellen said she sees “virtually no meaningful workaround for most countries for using the dollar as a reserve 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 is far and away the dominant reserve asset.”

According to data from the IMF’s Currency Composition of Foreign Exchange Reserves (COFER), the U.S. dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter last year. In second place was the euro, accounting for about 20.5% of reserves.

Meanwhile, the Chinese yuan — which some think is the biggest threat to the dollar — accounted for just 2.7% of reserves in the same period and nearly a third of that is held by Russia, according to a 2022 IMF paper.

While de-dollarization efforts are clearly underway, most financial commentators share Yellen’s view that the dollar will retain its throne.

Eurizon SLJ Asset Management strategists published a note in April, where they acknowledged the “exceptional” decline in the dollar’s market share in 2022 due to the sanctions taken by the US and its allies against Moscow — but they added: “the dollar will likely continue to enjoy dominance as an international currency for a while longer.”

Likewise, Fitch Solutions said it doesn’t expect a “paradigm shift,” any time soon, given that there's no feasible alternative to the U.S. dollar for international trade.

Are you worried about a decline in USD?

Whether the dollar is replaceable or not, you may be worried about how economic volatility, high inflation and stock market uncertainty could be impacting your own dollars — especially your retirement fund.

Why not look to foreign central banks for inspiration? In the past year, central banks worldwide have been ditching 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, according to the World Gold Council.

Gold is a great alternative because unlike the U.S. dollar, which has lost 98% of its purchasing power since 1971, gold’s purchasing power remains more stable over time.

You can get a piece of this golden 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, like coins, instead of stocks, mutual funds and other traditional investments.

Opting for a Gold IRA gives you the opportunity to both diversify your portfolio and stabilize your finances — and gold tends to yield less risk than other alternative investments.

If you want to open a Gold IRA, there are reputable services that’ll let you roll over your current 401(k) or IRA into this new account. To qualify, you need to be over 59 years old and have at least $70,000 to transfer.

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About the Author

Bethan Moorcraft

Bethan Moorcraft

Reporter

Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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