“A Brics currency could shake the dollar’s dominance” trumpeted one recent headline as another huge wave of speculation swept around the world over the demise of the US dollar.
Concrete proposals about the structure and functioning of a new currency for cross-border trade between Brazil, Russia, India, China and South Africa are noticeably absent. Much as they were in 2021 when Brazil’s president, Lula da Silva, made a speech advocating a new currency for the Mercosur trading bloc. Still, it doesn’t seem to have stemmed the confident calls that the greenback’s days of global dominance are over.
(At least Lula already had a name for his proposed currency – the ‘Sur’. Surely any Brics currency would simply be called a Bric – ‘how many Brics is that gonna cost me?’)
Meanwhile, the Chinese have recently labelled the dollar’s hegemony as “the main source of instability and uncertainty in the world economy,” which would surely have been classed as hyperbole even if it hadn’t come from this particular source.
The dollar’s share of central banks’ foreign reserves in the final quarter of 2022 did hit a two-decade low
To be fair it’s the US response to the Ukraine war – the weaponization of the dollar through the seizing of dollar denominated assets and controlling access to the dollar-based financial system – that has galvanized some countries’ exploration of non-dollar financing.
Specifically, the seizure of half of Russia’s $640 billion in gold and FX reserves following its invasion of Ukraine clearly prompted a re-think in countries such as Saudi Arabia, China, India and Turkey about diversifying to other currencies. Data has shown their central banks have continued to lower the proportion of their reserves in dollar-denominated assets.
According to data from the IMF, the dollar’s share of central banks’ foreign reserves in the final quarter of 2022 did hit a two-decade low. What many fail to note, however, is that the share of dollar-denominated reserves is still equal to that held in the 1990s – which was hardly the highpoint of a multi-polar currency world.
Some countries are also keen to move away from the dollar for trading as well as for reserves. In June 2023, Argentina announced to the world that it was proposing to pay the IMF with a mix of Chinese yuan and Special Drawing Rights, an indication for some that there are already alternatives to the dollar’s global monetary sovereignty.
Dollar scarcity
Let’s ignore, for now, the practical issues that are implicit in such predictions – the evolution of the yuan into fully convertible, unregulated currency – and look at the yuan itself. The yuan is falling precipitously, sparking obvious concern in China as the authorities instruct their state-controlled commercial banks to prop up its value
‘But this weakness is just a short-term valuation issue – it reflects disappointment with the country’s anticlimactic reopening performance – it has nothing to do with the long-term currency dynamics,’ is the response of the dying-dollar advocates.
Right?
Wrong. The yuan’s rapid and unrelenting fall is as much to do with dollar strength as yuan weakness – more in fact. The trading terminology of the markets can mask this truth because we talk about the Chinese commercial banks stepping in to ‘sell the dollar’, which has vaguely negative connotations about the desirability of holding dollars. In reality the trade is ‘providing dollars to the market’ due to dollar scarcity. Scarcity because demand is as high as it has ever been. Scarcity because the dollar is still the currency of the world’s highest-rated collateral. Scarcity because the dollar remains without substitute in global monetary terms.
And it’s this scarcity that’s causing Argentina to pay the IMF as it is. They are using yuan because they can’t get dollars. Doesn’t sound like weakness, does it? It’s also this scarcity that’s creating frustration in Brazil and other Bric nations, and is behind the aspirational talk about new currencies. Wouldn’t it be good if we could replace the dollar with a currency we could control?
Unfortunately for Lula, you can’t finance the Brazilian economy on aspirations. You still need dollars. And you will for a long time to come.
