The rapid reversal of 2022’s strong U.S. dollar rally, combined with efforts in China and elsewhere to decouple from dependence on the greenback, has put the dollar's status as the world's reserve currency into question again. While there may be discussions on the need for a new global reserve currency, transitioning away from the dollar involves significant challenges and risks.
The current number one contender to displace the dollar is a single currency that has not yet been chosen or created by the BRICS nations. BRICS is an acronym coined by a chief economist at Goldman Sachs in 2001 to describe the fastest-growing emerging economies of the time: Brazil, Russia, India, China, and South Africa. These countries were predicted to collectively dominate the global economy by 2050.
Since then, the group has become an official bloc, signing several multilateral agreements and meeting as BRIC at its first summit in 2009. The group is focused on securing its place in the global financial landscape without relying on Western systems. With South Africa joining in 2010, the "S" was added to the acronym.
In South Africa on Aug. 24, the 15th BRICS summit concluded with invitations extended to six countries to join as full members: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. A total of 42 countries have applied to be full members, but as of this meeting, only six were invited to join. The new members may officially join Brazil, Russia, India, China, and South Africa as of Jan. 1, 2024.
There are distinct advantages for these nations to join the BRICS bloc, including:
- New Development Bank (NDB): Established by the BRICS countries, the NDB was designed to finance infrastructure and sustainable development projects in BRICS and other developing economies. It serves as an alternative to Western-led financial institutions like the World Bank or the International Monetary Fund.
- Bilateral Swap Agreements: These were already in place to allow countries to exchange their national currencies directly without first converting them into U.S. dollars.
- Local Currency Settlement: Some BRICS nations have actively pursued trading with each other in their local currencies to reduce the demand for the U.S. dollar in their trade transactions.
Local currency settlement, however, does not mean that transactions are not invoiced on a dollar basis. In other words, transactions may be made in yuan, but the invoicing is based on the exchange rate between the yuan and the dollar in certain products. In these instances, the dollar will still play a role.
After the U.S.-led sanctions placed on Russia during its invasion of Ukraine – which included effectively removing them from the international settlement system known as SWIFT – many countries have gotten in line to join BRICS, publicly expressing worry about a system dominated by the West that could harm their economies if they don't align politically.
BRICS has also announced its intention to release a currency backed by gold to compete globally with the U.S. dollar, which could turn out to be a stabilizing factor within the bloc if it comes to fruition.
However, the stability, confidence, and economic dominance associated with the dollar are truly unmatched at this point in history. Despite recent concerns, the political stability of the dollar may become a hurdle too high for competing currencies to leap. Take Argentina, for example. They are one of the six countries offered an invitation to join BRICS. Still, according to an article in the Buenos Aires Times, the two leading opposition presidential candidates in the upcoming October elections (Javier Milei and Patricia Bullrich) say they would withdraw the approved application for BRICS membership if elected. This dissent could continue in the BRICS bloc as emerging nations struggle for political, economic and legal stability.
The United States has a solid legal and institutional framework that fosters trust and confidence in the dollar. The U.S. also has the world's deepest and most liquid financial markets, allowing nations to hold and transact large amounts of U.S. dollars with minimal impact on the currency’s value. Transitioning from the dollar to another reserve currency would be a long, complex and risky process. It would require a consensus among many nations and could lead to a period of global economic instability during any such transition.
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