18th August 2023

BRICS may launch own currency

 The BRICS nations have expressed their interest in developing a novel currency to rival the supremacy of the US dollar. What strides have they taken thus far, and what implications might ensue for the American currency in the event of their triumph?

Comprising Brazil, Russia, India, China, and South Africa, the BRICS nations are actively exploring the creation of a fresh reserve currency. This currency, still in its nascent stages of review and formulation, would be anchored by a combination of their respective currencies. The underlying intention is to establish economic autonomy and concurrently challenge the existing global financial framework, which is heavily dominated by the US dollar, accounting for around 90% of currency trading and virtually all oil transactions.

The ongoing backdrop of this scenario is the trade tension between the US and China, coupled with US sanctions against China and Russia. The potential establishment of a new reserve currency by the BRICS could potentially disrupt the demand for the US dollar, with repercussions for both the American and global economies.

What's motivating the BRICS nations to contemplate a new currency?

The BRICS nations are motivated by a spectrum of reasons for contemplating the inception of a fresh currency. Recent global financial upheavals and assertive foreign policies by the US have spurred these nations to ponder this prospect. Their aim is to serve their own economic interests more effectively, while concurrently reducing the global reliance on the US dollar and the euro.

What's the current state of progress? During the 14th BRICS Summit held in mid-2022, Russian President Vladimir Putin announced the intention of the BRICS nations to introduce a "new global reserve currency," and expressed willingness to engage openly with equitable partners. More recently, Brazilian President Luiz Inacio Lula da Silva voiced support for a BRICS currency, questioning the dominance of the dollar in trade relations.

Reactions from non-BRICS countries have been varied. Some nations such as Turkey, Egypt, and Saudi Arabia are contemplating joining the BRICS, with Saudi Arabia significantly increasing its procurement of Russian oil. As recently as July 2023, South Africa's BRICS ambassador, Anil Sooklal, stated that numerous countries have displayed interest in a BRICS currency.

Nevertheless, experts remain divided on the feasibility of a BRICS currency, pointing to the diverse economies within the bloc. Concerns also linger about non-Chinese members potentially becoming excessively reliant on China's yuan.

What advantages could a BRICS currency offer?

The envisaged currency could present several advantages for the BRICS nations, including streamlined cross-border transactions and greater financial inclusivity. Leveraging blockchain technology, digital currencies, and smart contracts, this currency could potentially revolutionize the global financial landscape. Facilitating frictionless cross-border payments, it could further stimulate trade and economic cohesion among the BRICS members and beyond.

A new BRICS currency could:

- Strengthen economic integration within the BRICS nations.

- Reduce the influence of the US on the global stage.

- Diminish the prominence of the US dollar as a global reserve currency.

- Spur other countries to form alliances aimed at developing regional currencies.

- Mitigate the risks stemming from global volatility due to unilateral measures and the diminishment of dollar dependence.

What implications would a new BRICS currency hold for the US dollar?

For decades, the US dollar has reigned supreme as the primary global reserve currency. Presently, the dollar is employed in over 74% of international trade, 90% of currency exchanges, nearly 100% of oil transactions, and close to 60% of foreign currency reserves in central banks. The dollar's share as a reserve currency has diminished with the ascendancy of the euro and yuan, yet it remains the most extensively employed reserve currency, trailed by the euro, yen, pound, and yuan.

The potential impact of a new BRICS currency on the US dollar is uncertain, as experts debate its capacity to challenge the dollar's dominance. Nevertheless, if the new currency were to stabilize vis-à-vis the dollar, it could mitigate the potency of US sanctions, potentially prompting a decrease in the dollar's value. This could potentially culminate in an economic crisis that affects American households.

This emergent currency could expedite the trend towards de-dollarization, as nations worldwide seek alternatives to the US dollar. Instances encompass China and Russia conducting trade in their respective currencies, along with nations such as India, Kenya, and Malaysia advocating for de-dollarization or forging agreements with other countries for trade in local currencies or alternative benchmarks.

While whether a new BRICS currency could catalyze the inception of other alternatives to the US dollar remains unclear, the potential to challenge the dollar's dominion as a reserve currency persists. As countries diversify their reserve holdings, the US dollar could encounter heightened competition from burgeoning currencies, potentially reshaping the equilibrium in global markets.

Ultimately, the repercussions of a new BRICS currency for the US dollar hinge on its adoption, perceived stability, and its capacity to offer a viable substitute for the dollar's longstanding hegemony.

How could a BRICS currency impact the economy?

A plausible shift towards a new BRICS currency could yield far-reaching implications for the North American economy and investors active within it. Various sectors and industries would experience substantial effects, including oil and gas, banking and finance, commodities, international trade, technology, tourism and travel, and the foreign exchange market.

Moreover, a new BRICS currency would introduce fresh trading pairs, modify currency correlations, and influence market volatility, necessitating investors to recalibrate their strategies accordingly.

How can investors brace for the advent of a new BRICS currency?

Adapting an investment portfolio in response to evolving trends related to the BRICS currency could pose challenges for investors. However, several strategies could be employed to capitalize on these trends. These include:

1. Diversifying currency exposure by investing in assets denominated in currencies other than the US dollar, such as bonds, mutual funds, or exchange-traded funds (ETFs).

2. Investing in commodities like gold and silver as a safeguard against currency risk.

3. Gaining exposure to BRICS equity markets through stocks and ETFs that track BRICS market indices.

4. Contemplating alternative investments like real estate or private equity within the BRICS nations.

Prudent investors will carefully evaluate these strategies in light of their susceptibility to market, political, and currency fluctuations.

In terms of investment instruments, ETFs like the iShares MSCI BIC ETF (ARCA:BKF) or the Global X MSCI China Financials ETF (ARCA:CHIX) could be considered. Likewise, investing in mutual funds such as the T. Rowe Price Emerging Markets Equity Fund, or individual companies within the BRICS countries, might be explored.

To encapsulate, preparing for a new BRICS currency or prospective de-dollarization warrants meticulous research and due diligence by investors. Diversifying currency exposure, investing in commodities, equity markets, or alternative investments constitute viable avenues to contemplate, while exercising prudence concerning associated risks.

Investor Takeaway

While the advent of a BRICS reserve currency remains uncertain, its emergence could yield considerable ramifications for the global economy and potentially contest the supremacy of the US dollar as the primary reserve currency. This evolution could present distinctive investment opportunities, while concurrently introducing risks to existing investments as the shifting landscape alters monetary policies and exacerbates geopolitical tensions.

Hence, investors should closely monitor the progression of a potential BRICS currency. In the event that the bloc indeed introduces one, attentiveness to the currency's impact on BRICS member economies and