As the 15th edition of the BRICS summit approaches, two topics are high on the grouping’s agenda: its expansion, with the arrival of several African countries in particular; and the development of a new currency to be used for cross-border trade by the BRICS nations, which may be seen a push for de-dollarization.
De-dollarization’s moment might finally be here with Russia’s recent announcement that it is now spearheading the development of a new currency, says Joseph W. Sullivan, a former special advisor and staff economist at the White House Council of Economic Advisers during the Trump administration.
In an article published in Foreign Policy last week, Joseph W. Sullivan notes that the new currency — here referred to as ‘BRIC’ — is to be used for cross-border trade by the BRICS nations: Brazil, Russia, India, China, and South Africa. These developments complicate the narrative that the dollar’s reign is stable because it is the one-eyed money in a land of blind individual competitors like the euro, yen, and yuan.
The article, titled “A BRICS Currency Could Shake the Dollar’s Dominance,” agrees with one economist’s assessment that “Europe is a museum, Japan is a nursing home, and China is a jail.” But, according to Sullivan, a BRICS-issued currency would be different. It’d be like a new union of up-and-coming discontents who, on the scale of GDP, now collectively outweigh not only the reigning hegemon, the United States, but the entire G-7 weight class put together.
If the new BRIC currency replaces the dollar as the reserve currency of the BRICS, the reactions will be varied and bizarre — from applause coming loudly from officials in BRICS countries with anti-imperialist dispositions to boos emanating mainly from the United States. Either way, the dollar’s reign is not likely to end overnight — but a BRIC would begin the slow erosion of its dominance.
How Would a New BRICS Currency Affect the US Dollar?
The BRICS nations are interested in creating a new currency to compete with the US dollar. What progress have they made so far, and what would happen to the American currency if they’re successful?
The BRICS nations, comprised of Brazil, Russia, India, China and South Africa, are looking to establish a new reserve currency backed by a basket of their respective currencies.
While still under review and development, the new currency would allow these nations to assert their economic independence while competing with the existing international financial system, which is dominated by the US dollar — it accounts for about 90 percent of all currency trading and nearly 100 percent of oil trading.
Central to this ongoing situation is the US trade war with China, as well as US sanctions on China and Russia. Should the BRICS nations establish a new reserve currency, it would likely significantly impact the US dollar, potentially leading to a decline in demand. In turn, this would have implications for the US and global economies.
Let’s look at the emerging BRICS currency and its potential implications for investors.
Why do the BRICS nations want to create a new currency?
The BRICS nations have a slew of reasons for wanting to set up a new currency. Essentially, they want to better serve their own economic interests while reducing global dependence on the US dollar and the euro.
Their new currency would be based on a basket of the five-nation bloc’s currencies, but what progress has actually been made so far? During the 14th BRICS Summit, held in mid-2022, Russian President Vladimir Putin announced that the BRICS countries plan to issue a “new global reserve currency,” and are ready to work openly with all fair partners.
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More recently, Brazilian President Luiz Inacio Lula da Silva expressed his support for a BRICS currency, commenting, “Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries? Who decided that the dollar was the (trade) currency after the end of gold parity?”
A new currency could have several benefits for the BRICS countries, including more efficient cross-border transactions and increased financial inclusion. By leveraging blockchain technology, digital currencies and smart contracts, the currency could revolutionize the global financial system. Thanks to seamless cross-border payments, it could also promote trade and economic integration among the BRICS nations and beyond.
A new BRICS currency would also:
- Strengthen economic integration within the BRICS countries.
- Reduce the influence of the US on the global stage.
- Weaken the standing of the US dollar as a global reserve currency.
- Encourage other countries to form alliances to develop regional currencies.
- Mitigate risks associated with global volatility due to unilateral measures and the diminution of dollar dependence.
The reaction from non-BRICS countries has been a mixed bag. Some nations, like Turkey, Egypt and Saudi Arabia, are considering joining the BRICS, and Saudi Arabia has been purchasing Russian oil at record levels. However, some experts believe that a BRICS currency is a flawed idea, as it would unite countries with very different economies.
There are also concerns that non-Chinese members might increase their dependence on Beijing’s yuan.
How would a new BRICS currency affect the US dollar?
For decades, the US dollar has enjoyed unparalleled dominance as the world’s leading reserve currency. As it stands, the dollar is used in over 74 percent of all international trade, 90 percent of currency exchanges, nearly 100 percent of oil trades and just under 60 percent of all foreign currency reserves held by central banks. And due to its status as the most widely used currency for conversion and its use as a benchmark in the forex market, almost all central banks worldwide hold dollars.
Although the dollar’s reserve currency share has decreased as the euro and renminbi have gained popularity, the dollar is still the most widely used reserve currency, followed by the euro, the yen, the pound and the renminbi. Recent global financial challenges and aggressive US foreign policies have prompted the BRICS countries to explore the possibility of launching a new currency.
The potential impact of a new BRICS currency on the US dollar remains uncertain, with experts debating its potential to challenge the dollar’s dominance. However, if a new BRICS currency was to stabilize against the dollar, it could weaken the power of US sanctions, leading to a further decline in the dollar’s value. It could also cause an economic crisis affecting American households.
This new currency could also accelerate the trend toward de-dollarization, with nations worldwide seeking alternatives to the US dollar. Examples include China and Russia trading in their own currencies, and countries like India, Kenya and Malaysia advocating for de-dollarization or signing agreements with other nations to trade in local currencies or alternative benchmarks.
While it is unclear whether a new BRICS currency would inspire the creation of other US dollar alternatives, the possibility of challenging the dollar’s dominance as a reserve currency remains. And as countries continue to diversify their reserve holdings, the US dollar could face increasing competition from emerging currencies, potentially altering the balance of power in global markets.
Ultimately, the impact of a new BRICS currency on the US dollar will depend on its adoption, its perceived stability and the extent to which it can offer a viable alternative to the dollar’s longstanding hegemony.
How can investors prepare for a new BRICS currency?
A potential shift toward a new BRICS currency could have significant implications for the North American economy and investors operating within it. Some of the most affected sectors and industries include:
- Oil and gas
- Banking and finance
- International trade
- Tourism and travel
- The foreign exchange market
A new BRICS currency would also introduce new trading pairs, alter currency correlations and affect market volatility, requiring investors to adapt their strategies accordingly.
Adjusting a portfolio in response to emerging BRICS currency trends may be a challenge for investors. However, several strategies can be adopted to capitalize on these trends. These are:
- Diversify currency exposure by investing in assets denominated in currencies other than the US dollar, such as bonds, mutual funds or exchange-traded funds (ETFs).
Invest in commodities like gold and silver as a hedge against currency risk.
Gain exposure to BRICS equity markets through stocks and ETFs that track BRICS market indexes.
Consider alternative investments such as real estate or private equity in the BRICS countries.
Prudent investors will also weigh these strategies against their exposure to market, political and currency fluctuations.
In terms of investment vehicles, investors could consider ETFs such as the iShares MSCI BIC ETF (ARCA:BKF) or the Global X MSCI China Financials ETF (ARCA:CHIX). They could also invest in mutual funds such as the T. Rowe Price Emerging Markets Equity Fund, or in individual companies within the BRICS countries.
Simply put, preparing for a new BRICS currency or potential de-dollarization requires careful research and due diligence by investors. Diversifying currency exposure, investing in commodities, equity markets or alternative investments are possible options to consider while being mindful of the associated risks.
The emergence of a new BRICS currency poses significant implications for the global economy, potentially challenging the US dollar’s dominance as the primary reserve currency. This development presents unique investment opportunities, while introducing risks to existing investments as the shifting landscape alters monetary policies and exacerbates geopolitical tensions. Hence, investors should closely monitor the impact on BRICS member economies and the broader global market, staying vigilant to capitalize on growth prospects and hedge against potential risks.