The US Congress held a hearing to discuss the growing international movement toward de-dollarization.
Numerous lawmakers expressed concern over what they referred to as growing “threats” to the “supremacy” of the dollar, warning that China and Russia are challenging the US-dominated international financial system.
Economists invited to testify in the session cautioned that Washington’s aggressive imposition of unilateral sanctions has backfired, weakening dollar dominance by encouraging targeted countries to develop new, alternative financial institutions.
Titled “Dollar Dominance: Preserving the U.S. Dollar’s Status as the Global Reserve Currency”, the June 7 hearing was organized by the House of Representatives Financial Services Committee’s Subcommittee on National Security, Illicit Finance, and International Financial Institutions.
The tone of the two-hour event was deeply schizophrenic. Speakers would triumphantly argue that the dollar remained unbeatable, that its hegemony was inevitable and natural, before a few minutes later complaining that foreign adversaries are conspiring to undermine it.
A neoconservative political economist who spoke, Daniel McDowell, boasted of how the dollar is “the king of all currencies” and “a powerful symbol of American financial royalty”.
Michael Faulkender, who served as Donald Trump’s assistant secretary of the Treasury for economic policy, stated proudly in the session, “As assistant secretary, I told my team that the Treasury secretary proudly states that the dollar will never not be the world’s reserve currency, and our job is to make sure that’s true”.
Representative Monica de la Cruz, a Republican from Texas, said dismissively, “Now this hearing comes at a critical time when some academics and naysayers are spreading theories that de-dollarization has begun, and that the beginning of the end has arrived for the dollar’s dominant role as a global reserve currency”.
The session was chaired by Republican Representative Blaine Luetkemeyer, a hard-line anti-China hawk from Missouri.
“The conversation around the dollar being the reserve currency is becoming louder and louder, as we have more and more I think threats to it”, he cautioned.
Luetkemeyer boasted of the many “economic advantages” that dollar hegemony gives to the United States:
The US dollar has been the preferred global currency since the end of World War Two, providing our nation inherent economic advantages, as well as responsibilities.
Today, an estimated 88% of all currency transactions by value are conducted in US dollars. Among other things, this limits the risk of a balance of payments crisis, which inherently lowers our exchange rate risk.
The dollar’s position also allows the United States and Americans to borrow at rates such as 50 to 60 basis points lower.
Our currency strength not only benefits the United States government, but also helps American consumers by lowering the price of imported goods, resulting in an estimated $25 to $45 billion a year in savings.
The bipartisan hearing was mostly dominated by Republicans, but it also featured some Democrats.
The ranking member of the subcommittee, Ohio Democratic Representative Joyce Beatty, began the session saying, “Thank you to our witnesses for appearing here today to discuss the preservation of the U.S. dollar as the global reserve currency, a topic which we all agree is of the utmost importance”.
Beatty’s rhetoric was less aggressive than that of Luetkemeyer, but she essentially echoed the same talking points, stating:
The dominance and supremacy of the currency affords the United States numerous benefits, from reduced borrowing costs, to increased financial stability, to influence over global financial markets.
It also allows us to leverage economic measures against those that seek to threaten our national security and foreign policy.
Given the undeniable value of the U.S. dollar’s dominance, it is critical that we address the currency and the present threats to it.
As we speak, foreign adversaries like Russia and China are actively working to undermine the U.S. dollar and cripple our global power and influence. We see this in Russia’s rapid accumulation of gold reserves over the last decade, as well as China’s development of non-SWIFT systems to settle and clear transactions involving the RMB.
Furthermore, several other countries are pushing efforts to bypass use of the U.S. dollar and the U.S.-led financial system.
That is why I agree that the subject of this hearing unquestionably deserves our time and attention in Congress and in this subcommittee.
The hearing also featured testimony from Tyler Goodspeed, a right-wing economist who chaired the Council of Economic Advisers when Trump was president.
The fact that 90% of all foreign exchange transactions continue to involve the United States dollar, and that global central banks continue to hold almost 60% of their foreign exchange reserves in U.S. dollars, confers net economic benefits on the United States economy.
First, foreign demand for reserves of U.S. dollars raises demand for dollar-denominated securities, in particular United States treasuries. This effectively lowers the cost of borrowing for U.S. households; U.S. companies; and federal, state, and local governments.
It also means that, on average, the United States earns more on its investments in foreign assets than we have to pay on foreign investments in the United States, which allows the United States to import more goods and services than we export.
Second, foreign demand for large reserves of U.S. dollars and dollar-denominated assets raises the value of the dollar, and a stronger dollar benefits U.S. consumers and businesses that are net importers of goods and services from abroad.
Third, large reserve holdings of U.S. currency abroad, in effect, constitutes an interest free loan to the United States worth about $10 to $20 billion per year.
Fourth, the denomination of the majority of international transactions in U.S. dollars likely modestly lowers the exchange rate risks faced by U.S. companies.
Fifth, given the volume of foreign U.S. dollar holdings and dollar-denominated debt, monetary policy actions by foreign central banks generally have a smaller impact on financial conditions in the United States than actions by the United States central bank have on financial conditions in other countries.
Marshall Billingslea, the Treasury’s assistant secretary for terrorist financing under Trump, who also previously worked in the Pentagon, expressed concern that the central banks of China and Russia have been de-dollarizing their foreign-exchange reserves and instead buying other assets, such as gold, which cannot be easily sanctioned:
If we look at what Russia did in the run-up to its further invasion of Ukraine, they began dumping ownership of Treasury bonds in 2018. In that year, they plummeted from $96 billion in holdings down to $15 billion.
And they also started buying large amounts of gold.
China is now … embarking on its own gold-buying spree. I haven’t seen the data for May, but April marked the sixth straight month of Chinese expansion in its gold holdings.
And I’m not sure I believe the official figures. We have to recall that China is the dominant gold-mining player around the world, and half of those gold-mining companies are state-owned.
So the actual size of China’s war chest, when it comes to gold reserves, may be far higher, in fact I suspect inevitably far higher than official numbers suggest.
Last year, China also started dumping its treasuries. 2022 marked the largest or second-largest decrease on record, with a drop of about $174 billion, and China stood at the lowest level since 2010 in terms of its holdings.
In the hearing, Billingslea also warned that, as China stockpiles gold in its foreign-exchange reserves, it could start issuing yuan-denominated contracts that are backed by gold:
The thing I do worry – I come back to this fact that they’ve been buying a lot of gold – is that one of the things that they could do, which would be very concerning, if they wind up having larger reserves of gold than we we believe, is they could start issuing one yuan-, or gold-denominated, gold-backed yuan contracts.
That would further their ambition for introducing the yuan onto the world stage.
Also present in the hearing was Daniel McDowell, an associate professor in the political science department at Syracuse University in New York, and author of the book “Bucking the Buck: US Financial Sanctions and the International Backlash Against the Dollar”.
McDowell argued that, by imposing more and more sanctions on countries around the world, Washington is actually weakening the dominance of the dollar.
The US has sanctions on countries that represent more than one-third of the global population and 29% of global GDP.
Dollar preeminence and U.S. financial centrality are not without consequence for American coercive power, as you all know.
With little more than the stroke of the president’s pen, or through an act of Congress, the U.S. government can use financial sanctions to impose enormous economic costs on targeted foreign actors, be they individuals, firms, or state institutions, by freezing their dollar assets or cutting them off from access to the banks through which those dollars flow.
As the United States has increased its reliance on financial sanctions as a tool of foreign policy, it has provoked anti-dollar policy responses from our adversaries.
Though such steps are unlikely to upend the dollar’s position as top international currency, including the reserve currency role, over time such policies could diminish the coercive capabilities that the United States derives from dollar centrality.
Over the last two decades, the United States has used the tool of financial sanctions with increasing frequency.
For example, in the year 2000 just four foreign governments were directly targeted under the U.S. treasury country program, overseen by the Office of Foreign Assets Control, or OFAC. Today, that number is greater than 20; and if we include penalties from secondary sanctions, the list gets even longer.
The more that the United States has reached for financial sanctions, the more it has made adversaries in foreign capitals aware of the strategic vulnerability that stems from dependence on the dollar.
Some governments have responded by implementing anti-dollar policies, measures that are designed to reduce an economy’s reliance on the U.S. currency for investment and cross-border transactions.
While these measures sometimes fail to achieve their goals, others have produced modest levels of de-dollarization.
Notable examples here include Russian steps to cut its dollar reserves and reduce the use of the dollar in trade settlement in the years leading up to its full-scale invasion of Ukraine, or China’s ongoing efforts to build its own international payments network based on the yuan – efforts that have taken on a new sense of urgency as Beijing has become more aware of its own strategic vulnerabilities from dollar dependence.
However the growing number of states espousing anti-dollar viewpoints and adopting anti-dollar policies does threaten to weaken the future potency of U.S. financial sanctions.
Finally, whenever possible U.S financial sanctions should be coordinated with our allies in Europe and Asia, who should feel as if they are key stakeholders in the dollar system, and not vassals to it.
Another Republican congresswoman who participated in the hearing, Young Kim from California, complained that China has developed other ways to provide financing to countries that don’t involve the US dollar.
Kim singled out the currency swap-line agreements that the People’s Bank of China has signed with the central banks of other countries, such as Argentina, which is a way for Beijing to provide liquidity or credit in yuan, bypassing Washington-dominated financial institutions like the SWIFT inter-bank messaging system:
We should all be troubled by the increase of central bank swap-line agreements deployed by the People’s Bank of China.
According to a 2021 PBOC report, it said that it has swap facilities with 40 countries, with a combined capacity of almost 4 trillion yuan, or about $570 billion dollars.
And just a few days ago, Argentina, a country facing a deep currency devaluation and 109% annual inflation, they announced a deal to renew its currency swap line with China and double the amount it can access to nearly $10 billion dollars.
So the PBOC justifies the swap lines as a way to force countries to utilize the yuan as a method of exchange.
So I want to ask you, Mr. Billingslea, instead of liberalizing its capital account and allowing the yuan to be fully convertible into the currency exchange markets, the CCP has opted to increase its bilateral swap-line agreements to further internationalize its currency.
So is there anything that the United States can do to slow down or reduce adaptation of the PBOC’s currency swap lines.
Although participants in the hearing treated the hegemony of the US currency as desirable, arguing it must inevitably be maintained. The five expert witnesses who were invited insisted that there is no short-term threat to dollar dominance.
The two-hour hearing did not address possible plans for the BRICS bloc to create a new international reserve currency. Instead, the participants only spoke of existing national currencies like the Chinese renminbi, Russian ruble, or euro as possible challengers to the US dollar – while ultimately dismissing all of them.
The possibility that BRICS could develop an international currency (similar to John Maynard Keynes’ idea of the Bancor) was not even raised as a possibility.