The BRICS nations, consisting of Brazil, Russia, India, China, and South Africa, are contemplating establishing a new reserve currency to compete with the US dollar. This new currency would be supported by a basket of their respective currencies, allowing them to assert their economic independence and challenge the existing international financial system, which is currently dominated by the US dollar. While still under review and development, the potential currency could significantly impact the US dollar, leading to a decline in demand and affecting the global economy.
Why BRICS Nations Want to Create a New Currency BRICS nations have several reasons for wanting to establish a new currency. Recent global financial challenges and aggressive US foreign policies have prompted these countries to explore the possibility. They want to serve their economic interests better while reducing global dependence on the US dollar and the euro.
Progress Towards a New BRICS Currency
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. Brazilian President Luiz Inacio Lula da Silva also expressed his support for a BRICS currency, stating that an institution like the BRICS bank could have a currency to finance trade relations between Brazil and China, among other BRICS countries.
While some nations, such as Turkey, Egypt, and Saudi Arabia, are considering joining the BRICS, 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 China’s yuan.
Advantages of a New BRICS Currency
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. 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.
Impact on 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.
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 were 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 accelerate the trend toward de-dollarization, with nations worldwide seeking alternatives to the US dollar. Examples include China and Russia trading in their 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.
Impact on the Economy
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, commodities, international trade, technology, tourism, travel, and 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.
Strategies for Investors
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, including:
- 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.
Conclusion
Although the creation of a BRICS reserve currency is not certain, its emergence would pose significant implications for the global economy and potentially challenge the US dollar’s dominance as the primary reserve currency. This development would present unique investment opportunities while introducing risks to existing investments as the shifting landscape alters monetary policy and exacerbates geopolitical tensions. Investors should closely monitor the progress of a possible BRICS currency and watch its impact on BRICS member economies and the broader global market.
