Yellen on Dollar’s Dominance

Photo Credit: Al Drago/Pool via Reuters

This year Janet Yellen, Secretary of Treasury, has become a harbinger of the subtle displacement of the US dollar as the world’s reserve
currency. With ‘end is nigh’ sentiments galore, the US media has made the narratives abundantly clear that threats to the US dollar are an imminent reality.

Although this appears to be hyperbole, the Treasury Secretary joins a long list of leading figures in the Western world who have expressed a notion of a nominal shift in the greenback’s dominance. Back in April, ECB President Christine Lagarde announced that global competitors were seeking ‘alternatives to major traditional currencies for international trade.’

During the Housing Financial Services Committee hearing on Tuesday, the threat posed by China was raised several times. Yellen was asked how the Treasury would respond if China — the second largest creditor of US treasuries — “dumped” $859 Bn in treasury securities “overnight” following an invasion of Taiwan. Yellen responded that she was “certainly concerned” about the possibility, but had not considered the scenario in detail. In response, lawmakers instructed that the Treasury and Federal Reserve “make preparations” and “be on the ready” for such an event. Trade wars have been occurring in excess since the end of Bretton Woods and it seems that countries once in a more developmental phase are now positioning themselves for economic sovereignty. The divestment of US assets and the use of alternate currencies in world trade are a geopolitical protest and one that seems to be an upcoming trend for the foreseeable time.

Some reports have pointed toward an upsurge in foreign central banks’ demand for gold as another way to reduce their reliance on dollar reserves. All things considered, this urge for countries to diversify is natural in such heated political times. Yellin intimated that “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, and that is we have deep liquid open financial markets, strong rule of law and an absence of capital controls that no country is able to replicate. It will not be easy for any country to devise a way to get around the dollar.”

But US lawmakers aren’t helping the dollar’s cause, Yellen suggested. Earlier in the hearing, she reiterated her long-standing concern over the US debt ceiling crisis, saying it undermines global faith in the nation’s ability to meet its debt obligations, deteriorating the greenback’s reputation.

In a 2022 interview with CNN’s Wolf Blitzer Yellen stated “I think I was wrong then about the path that inflation would take,” when asked about comments from 2021 that inflation posed only a “small risk.”

“As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I, at the time, didn’t fully understand, but we recognize that now,” Yellen said.

Experts know that our inflation isn’t ‘transitory’. It’s common knowledge that only the biggest players in every industry benefit the most from federal and state subsidies. We know federal and state sponsored scarcity, special
interest market barriers, and excessively lax monetary policies put forth by the Fed and the FOMC are to blame for the growing disparity between wage and CPI as well as the weakening of the US dollar in the world’s stage. Annual rent inflation stood at 8.7% in May, while shelter costs overall were up 8% year over year.

The rise in housing costs accounted for more than 60% of the total increase in core CPI in May. Futures markets are predicting a roughly 70% chance of a rate increase at the Fed’s July 25-26 meeting in order to tighten the money supply and to mitigate inflation. As far as the dollar’s overall dominance as the world’s primary reserve currency, there is a looming perception that it is on the decline and the reality that debt as a primary export isn’t feasible for meeting long-term economic solidarity domestically which affects our currency’s strength in the international markets.

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