Could Western Sanctions Harm US Dollar?

US Treasury Secretary Janet Yellen has cautioned that the dollar’s hegemony in the world may be threatened by economic sanctions imposed on nations including Russia. According to her, there’s a chance that the dollar’s hegemony will be weakened over time if financial sanctions are tied to it. She did, however, add that the US only “judiciously” employs the dollar as a tool, and that it is a useful one.

As Beijing hopes to establish the Chinese yuan as the world’s most important reserve currency, it is beginning to challenge the US dollar. The yuan still has a relatively long way to go, though, mostly because Beijing continues to closely control its value and it isn’t currently fully convertible to other currencies on the international market. According to Bloomberg’s transaction statistics released on April 3, the yuan moved ahead of the dollar to become the most traded currency in Russia for the first time in February.

Russian businesses are now trading in other currencies including the yuan, the Hong Kong dollar, and the UAE dirham as a result of the harsh sanctions imposed by the West on Russia due to the conflict in Ukraine. According to Bloomberg’s transaction statistics released on April 3, the yuan moved ahead of the dollar to become the most traded currency in Russia for the first time in February.

According to a March 21 report by Russia’s RBC media source, Russian President Vladimir Putin informed Chinese President Xi Jinping that Russia was prepared to transition to using the yuan for settlements involving overseas commerce. In a report released on March 24 on the Smartkarma research platform, Steno Research, a Danish research organisation, stated that this is only the final phase of one of the main Chinese master plans, which is to allow Shanghai to displace New York as the global financial centre and pivot point.

Yellen maintains her confidence in the dollar’s widespread use, citing the US’s robust capital markets and legal system as essential components of a currency that will be utilised for transactions around the world.