Leaders from the BRICS countries – Brazil, Russia, India, China, and South Africa – gathered in Johannesburg to explore ways to diminish the dollar’s prevailing influence in the global economy. These leaders pressed forward toward their ultimate goal of dethroning the dollar from its global supremacy, a move they argue would usher in a new world order characterized by peace, harmony, and prosperity. However, amid their aspirations for a new global reserve currency, underlying issues surfaced that couldn’t be brushed aside.
Trouble for Currencies
China and India, both nuclear-armed founding members of BRICS, found themselves entangled in a border dispute in the Himalayas, rekindling the embers of their 1962 war. This situation raised questions about the feasibility of launching a joint global reserve currency when two of its most influential members were engaged in a military standoff.
Despite their border tensions, China and India shared a common stance: they weren’t keen on transforming their currencies into easily traded entities like the dollar. In fact, both nations had imposed capital controls to prevent currency outflows and intended to maintain these controls for the foreseeable future.
One of the primary attractions of the dollar for international transactions is the absence of government intervention in currency markets, allowing it to flow freely across borders with its value determined by market forces.
Unable to make significant progress toward a dollar alternative, the BRICS leaders took a step to expand their group by formally inviting six other nations to join: Saudi Arabia, Iran, Argentina, Egypt, Ethiopia, and the United Arab Emirates. Unfortunately, the inclusion of Saudi Arabia and Iran raises questions about the commitment to promoting global democracy and human rights.
Ulterior Motives
Geopolitical analysts following the BRICS’ evolution suggest that a key motivation behind the conference is to limit the United States’ ability to wield the dollar as a tool for imposing sanctions on other nations. For countries facing the repercussions of bad behavior, such as having their currency reserves frozen or being locked out of international financial systems like SWIFT, ending the dollar’s dominance might seem appealing.
To some BRICS leaders, it appears their agenda is primarily driven by a desire to evade potential consequences rather than to promote a new world order.
Numbers Don’t Lie
The International Monetary Fund (IMF) closely monitors currency reserves and reports that the dollar constitutes 58% of global currency reserves, far surpassing all other currencies. This suggests a high level of confidence in the U.S. dollar, underpinned by the stability of the U.S. economy, its openness to trade and capital flows, strong property rights, and the rule of law. The dollar’s dominance is further bolstered by the depth and liquidity of U.S. financial markets, which are unrivaled.
Additionally, the dollar remains the dominant currency in global trade, accounting for 90% of global foreign exchange transactions according to data from the Bank for International Settlements. In a noteworthy development, the U.S. Dollar Index, tracking the dollar against major currencies, has surged approximately 6% since mid-July.
The Greenback’s Strength
In conclusion, while discussions about a shift away from the dollar’s dominance continue to emerge, the numbers tell a different story. The dollar’s stability, liquidity, and role in global trade make it a formidable force. As it stands, the dollar remains firmly entrenched in its position as the world’s primary reserve currency.
Conclusion: Before we start to write off the dollar, it is clear that the US currency still holds a powerful grip on the global financial stage.
Sven Franssen