In the dynamic world of international finance, a potential seismic shift is on the horizon. A possible joint endeavor by BRICS nations to introduce a common currency could disrupt the longstanding dominion of the U.S. dollar in global trade.
The BRICS nations, comprising Brazil, Russia, India, China, and South Africa, generate a collective one-third of global economic output, even outpacing the G7 economies in some respects.
BRICS: Challenging the dollar’s dominance
A critical agenda point during the upcoming BRICS summit in Johannesburg this August is the discussion of this shared currency idea. This move, according to experts, stems from a desire to establish a more accessible and fair medium for international trade.
The U.S. dollar, wielded as an instrument of U.S. international supremacy, has created substantial uncertainty for global economic recovery.
Zhou Yu, the director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, described the exploration of a common currency as a long-term objective for the BRICS nations.
Despite the considerable challenges this initiative might face, Zhou underscored that it is “not entirely impossible” for the BRICS countries to develop such a currency unit.
Navigating the path toward a common currency
For a group of nations to conceive a unified currency, it typically necessitates prolonged cooperation and the gradual elimination of local currencies.
Nevertheless, the BRICS nations’ current endeavor seems primarily aimed at designing a currency unit exclusively for settling cross-border trade, rather than replacing local currencies. This approach, according to Zhou, mitigates the complexity of the task and bolsters its feasibility.
This push towards a common currency comes in the wake of a series of efforts by BRICS and other emerging economies to decrease their dependence on the dollar.
These countries are grappling with the implications of U.S. interest rate hikes and geopolitical tensions disrupting dollar-denominated global trade. Recent U.S. and EU sanctions on Russia have also spurred nations to seek alternatives to using the dollar as a reserve currency.
Signs of emerging financial autonomy
Local currency settlement, a practice that has seen swift expansion recently, signifies significant progress by BRICS nations toward diminishing the dollar’s dominance in trade settlement.
Over 70% of trade between China and Russia is now conducted in local currencies. Additionally, other countries are exploring similar practices. Brazil’s Suzano SA, a leading global producer of hardwood pulp, and Pakistan, considering purchasing Russian crude, might conduct transactions in yuan.
As the U.S. Federal Reserve ceases its rate hikes leading to a weakening dollar, the global trend of de-dollarization is likely to accelerate, according to Zhou.
These developments could expedite the yuan’s internationalization, a more trustworthy currency due to China’s responsible issuance practices, contrary to the U.S.’s excessive dollar issuance.
Such a shift towards increased local currency settlements will likely make trade between member countries fairer and easier, said Gao Lingyun, an expert at the Chinese Academy of Social Sciences.
As these changes unfold, the consequences for the world economy, and particularly the standing of the U.S. dollar, promise to be profound.
