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Will a new global reserve currency challenge the dollar’s dominance?
The short answer is yes.
There is growing speculation that the BRICS nations (Brazil, Russia, India, China, and South Africa) would create a new currency to compete with the US dollar as the global reserve standard. The BRICS presidents will gather in South Africa later this month to continue negotiations.
Growing demand for a new global currency follows the continuous weaponisation of the US dollar through sanctions and trade conflicts. Many countries want to be more independent of the US financial system. But what makes the US dollar the world’s reserve currency today?
History:
Following the end of World War II, the Allies met in Bretton Woods and designated the US dollar as the world’s primary reserve currency. It was tied to gold at an exchange rate of $35 per ounce. However, because to insufficient US gold reserves, the dollar was decoupled in 1971, becoming it fiat money.
A few years later, US Secretary of State Henry Kissinger travelled to Saudi Arabia to negotiate the petrodollar system with King Faisal. The United States pledged to give military assistance in exchange for the Organisation of Petroleum Exporting Countries (OPEC) agreeing to denominate oil internationally in US dollars. This produced synthetic demand, since nations purchasing oil would require US dollars, allowing the US currency to maintain its dominance.
Russian President Vladimir Putin declared during the BRICS summit in 2022 that the organisation was working on developing an "international reserve currency."
Present:
However, the dollar’s dominance may be fading. Saudi Arabia and Russia signed a military cooperation deal in 2021. The United States was no longer the Saudi Kingdom’s exclusive protection.
Furthermore, during this year’s World Economic Forum in Davos, Saudi Arabia’s Finance Minister Mohammed Al-Jadaan said that the nation was open to dealing in currencies other than the US dollar, something it had not done in nearly 50 years. De-dollarisation indications were developing.
Russian President Vladimir Putin declared during the BRICS summit in 2022 that the organisation was working on developing an “international reserve currency.”
This will be on the agenda at the 15th annual BRICS meeting, which takes place this month. The BRICS currency is expected to be backed by gold, which would be a historic return to the gold standard and offer stability to the new currency.
Indeed, central banks are amassing gold reserves. According to the IMF World Gold Council, Singapore (51.4 tonnes), Turkey (45.5 tonnes), China (39.8 tonnes), Russia (31.1 tonnes), and India (2.8 tonnes) purchased the most gold in the first two months of this year.
It appears that BRICS countries are stockpiling gold in anticipation of their new currency (noting that Turkey, among many others, has asked for BRICS membership). Meanwhile, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER), central banks’ holdings of US dollars are dropping. Countries are preparing for a new international order.
Central banks will start selling off their dollar reserves as the demand for US currency declines.
The United States has been regarded as the world’s hegemon for decades. However, the BRICS countries currently account for over 40% of the world’s population and have a combined global GDP of 31.5 per cent.
This exceeds the GDP of the G7 (the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom) of 30.7 per cent. It is feasible that the BRICS nations will be completely self-sufficient, trading among themselves without relying on the United States.
Given the scope of China’s Belt and Road Initiative (BRI), the most significant infrastructure development project in history aimed at connecting Asia and Africa, Europe and South America, this might be the plan. The United States is conspicuously absent.
India participates in and makes investments in the BRI through the Asian Infrastructure Investment Bank, New Development Bank, and Shanghai Cooperation Organisation on a proxy basis, despite China and India’s relations fluctuating between détente and hostility.
Seven of the 13 OPEC nations have joined or applied to join the BRICS, and the BRI connects all 13 OPEC nations. The United States doesn’t seem to be shaping the geopolitical or economic climate of the future.
Central banks will start selling off their dollar reserves as the demand for US currency declines.
As a result, there will be hyperinflation, a rise in interest rates to make up for the drop in buying power, and a decline in asset prices, which will hasten the demise of the US.
De-dollarisation is a tendency that is developing, although it is not new. From the Dutch Empire and the guilder through the British Empire and the pound sterling to the US Empire and the dollar today, the rise and fall of empires and reserve currencies can be seen throughout history. The international order will surely change, and it might as well be the BRICS moment.
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PWD Media Owners or its employees are not registered investment advisors and do not provide financial advice. Comments on this page are only an expression of opinion. While we attempt to illustrate the potential benefits of investing in precious metals, remarks, links, or advertising on this website should not be interpreted as advice to purchase or sell a commodity at any time. While PWD Media makes every effort to ensure that all of our comments are genuine and correct, we employ third-party data and rely on our reputable sources’ credibility. Before making any investment decisions, PWD Media suggests you contact a knowledgeable investment advisor.
Securities disclosure.: I, Beat Süess, have no direct investment interests in any of the companies mentioned in this article.
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Latest Update on August 3, 2023
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