Can BRICS currency be adopted?

Brazilian President called on Wednesday for the BRICS nations to create a common currency for trade and investment between each other, as a means of reducing their vulnerability to dollar exchange rate fluctuations. Luiz Inacio Lula da Silva made the proposal at a BRICS summit in Johannesburg.

Officials and economists have pointed out the difficulties involved in such a project, given the economic, political and geographic disparities between Brazil, Russia, India, China and South Africa.

Brazilian president doesn't believe nations that don't use the dollar should be forced to trade in the currency, and he has also advocated for a common currency in the Mercosur bloc of South American countries.

A BRICS currency increases our payment options and reduces our vulnerabilities, he told the summit's opening plenary session.

South African officials had said a BRICS currency was not on the agenda for the summit.

I n July, India's foreign minister said, "There is no idea of a BRICS currency". Its foreign secretary said before departing for the summit that boosting trade in national currencies would be discussed.

Russian President Vladimir Putin said the gathering, which he attended via video link, would discuss switching trade between member countries away from the dollar to national currencies.

China has not commented on the idea. President Xi Jinping spoke at the summit of promoting the reform of the international financial and monetary system.

Building a BRICS currency would be a political project, South African central bank governor Lesetja Kganyago told a radio station in July.

"If you want it, you'll have to get a banking union, you'll have to get a fiscal union, you've got to get macroeconomic convergence," Kganyago said.

"Importantly, you need a disciplining mechanism for the countries that fall out of line with it... Plus they will need a common central bank... where does it get located?"

Trade imbalances are also a problem, Herbert Poenisch, a senior fellow at Zhejiang University, wrote in a blog for think-tank OMFIF.

All BRICS member countries have China as their main trading partner and little trade with each other.

BRICS leaders have said they want to use their national currencies more instead of the dollar, which strengthened sharply last year as the Federal Reserve raised interest rates and Russia invaded Ukraine, making dollar debt and many imports more expensive.

Russia's sanctions-imposed exile from global financial systems last year also fuelled speculation that non-western allies would shift away from the dollar.

"The objective, irreversible process of de-dollarisation of our economic ties is gaining momentum," Putin told the summit on Tuesday.

The greenback's share of official foreign exchange reserves fell to a 20-year low of 58% in the final quarter of 2022, and 47% when adjusted for exchange rate changes, according to International Monetary Fund data.

The dollar still dominates global trade. It is on one side of almost 90% of global foreign exchange transactions, according to Bank of International Settlements Data.

De-dollarizing would need countless exporters and importers, as well as borrowers, lenders and currency traders across the world, to independently decide to use other currencies.

 

US dollar dominance diminishing

The US dollar grip as the dominant global currency is loosening, said top economist of credit rating agency S&P Global on Tuesday.

Aggressive US sanctions such as last year's freezing of hundreds of billions of US dollar's worth of Russia's reserves has seen a flurry of countries start to do some trade in currencies other than dollar as well as repatriate gold reserves.

The dollar "doesn't have quite the pull it used to," Paul Gruenwald, S&P's chief economist, said at a conference hosted by the ratings firm in London.

"There's a fragmentation around the edges".

Gruenwald pointed to a number of examples where countries were now circumventing the dollar, "We've got other things happening outside of the dollar world".

He cited the rise in trade done in China's yuan and the cheap financing offered by China-headquartered development banks such as the Asia Infrastructure Investment Bank and the New Development Bank, formerly known as the BRICs bank.

"The US dollar will continue to be a leading world currency, but it will no longer be the dominant world currency," Gruenwald said.

US dollar sank to a two-month low against its major peers on Wednesday in the lead-up to a key US inflation reading, while sterling scaled a 15-month top on expectations the Bank of England (BoE) has further to go in raising rates.

US inflation data is due later on Wednesday, with expectations core consumer prices rose 5% on an annual basis in June. The figures should also provide further clarity on the Federal Reserve's progress in its fight against inflation.

Ahead of the release, the US dollar fell to a two-month low against a basket of currencies, extending its losses from the start of the week after Fed officials said the central bank was nearing the end of its current monetary policy tightening cycle.