12 April 2023

Currency Wars: Is De-dollarisation really coming soon?


The global economy is experiencing a growing interest from the East in exploring alternatives to the US dollar as the dominant reserve currency. The BRICS nations (Brazil, Russia, India, China, and South Africa), representing over 3 billion people and 23% of global GDP, are spearheading this movement by examining the creation of a new currency for their economic bloc. With de-dollarisation discussions gaining traction, it's crucial to assess the optimistic perspective from the East and the skepticism from the West. This article presents a balanced analysis of recent developments in the currency landscape and the likelihood of de-dollarisation becoming a reality.


BRICS Nations: Pursuing a New Currency

Coined in 2001 by then-chairman of Goldman Sachs Asset Management, Jim O’Neill, the term 'BRIC' initially referred to the emerging economies of Brazil, Russia, India, and China. South Africa joined in 2010, and the BRICS countries now collaborate on economic and trade issues, establishing institutions like the New Development Bank. With a combined GDP exceeding $16 trillion and encompassing approximately 42% of the world's population, BRICS members are currently contemplating a new currency, which they plan to present at the upcoming leaders' summit in South Africa in August.

Alexander Babakov, Deputy Chairman of the Russian State Duma, has outlined a two-step process for this transition. The first step involves shifting to settlements in national currencies, followed by the circulation of a new digital currency in the near future. Recent bilateral agreements among BRICS countries further support this initiative, allowing trade using national currencies and bypassing the US dollar. For example, Russian President Vladimir Putin and Chinese President Xi Jinping agreed to adopt the Chinese yuan as a settlement currency with emerging economies. Additionally, the Chinese government has signed a similar deal with Brazil, allowing both countries to bypass the US dollar in their bilateral transactions.


Eastern Optimism: Towards a Multipolar Currency World

Eastern proponents of de-dollarisation argue that a new shared currency would promote economic cooperation among the BRICS nations and create a more diversified international monetary system. They envision a multipolar currency world, where no single currency dominates, reducing emerging markets' vulnerability to US dollar fluctuations and improving their resilience to global financial volatility.

The optimism surrounding this new currency stems from the potential for a more balanced and equitable monetary system serving the BRICS countries and other emerging markets. Babakov emphasises that the new currency should not depend on the US dollar or euro but serve the shared objectives of the BRICS nations. Additionally, the increasing adoption of the Chinese yuan in international trade is seen as a positive development towards a multipolar currency world.


Western Scepticism: Upholding the US Dollar's Dominance

Conversely, Western skeptics argue that the US dollar's entrenched dominance in global trade and finance is difficult to challenge. The dollar has long been the world's primary reserve currency, providing stability and liquidity to the international monetary system. Its widespread use and network effects make it challenging for alternative currencies to gain significant global traction.

Furthermore, skeptics highlight the limitations of alternative currencies, such as the Chinese yuan, as factors supporting the US dollar's dominance. The yuan faces challenges due to China's closed capital account and concerns over transparency and government control.

Importantly, the BRICS nations' ambitions to establish a new shared currency can be viewed as a political challenge to the US's global hegemony. This challenge to the existing global financial order underscores the geopolitical dimensions of currency wars and adds complexity to the debate over the US dollar's future as the primary reserve currency.


A Balanced View: Adoption of Alternative Currencies

Although the BRICS nations have started using their national currencies for settlements, the US dollar remains the dominant currency in global trade and finance. For instance, as of 2021, the US dollar accounted for approximately 59% of global foreign exchange reserves, according to the International Monetary Fund (IMF), while the Chinese yuan made up only around 2.5% of the reserves. Moreover, the Bank for International Settlements (BIS) reported that in 2022, the US dollar was involved in 88% of global foreign exchange trades, whereas the Chinese yuan's share was a mere 7%.

These statistics demonstrate that although the increased use of the Chinese yuan for trade invoicing has been observed, it has not yet significantly threatened the dominance of the US dollar in global trade and finance. The US dollar continues to be the preferred choice for most investors and central banks, highlighting the long road ahead for alternative currencies to gain a substantial foothold in the global financial system.


Implications for the Global Economy

A gradual shift towards a multipolar currency world could potentially reduce the vulnerability of emerging markets to fluctuations in the US dollar's value and reshape the international monetary system. However, the dollar's dominance means that these potential benefits or consequences may still be far off.

A reduced reliance on the US dollar could also impact the United States' ability to finance its external debts, as it currently depends heavily on the global demand for dollar-denominated assets. However, the continued strength of the US dollar suggests that any such pressure may not be imminent.


Key Takeaways

Recent developments in the currency landscape, led by the BRICS nations' efforts to create a new form of currency, propose that a gradual shift towards a multipolar currency world may be underway is their ambitious move for economic self-interest. However, the US dollar's continued dominance in global trade and finance indicates that de-dollarisation is not an imminent threat. While the Eastern optimism around exploring alternatives to the US dollar is an essential part of the evolution of the global economy, it is also important to acknowledge the challenges involved in truly challenging the dollar's dominance, as highlighted by the Western skepticism. Ultimately, a balanced approach is necessary to understand the complex dynamics of the ongoing currency wars and the potential for de-dollarisation in the future.

Disclaimer: Any information presented is for general education and informational purposes hence, not intended to be and does not constitute investment or trading advice or recommendation. No opinion given in the material constitutes a recommendation by M4Markets that any particular investment, security, transaction or investment strategy is suitable for any specific person.

It does not take into account your personal circumstances or objectives. Any information relating to past performance of an investment does not necessarily guarantee future performance.

Trinota Markets (Global) Limited does not give warranty as to the accuracy and completeness of this information.

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