Talks of a new financial order are once again in the air. The BRICS summit, which took place in late-August, has called into question the US Dollar’s long-held position as the world’s reserve currency. For years, the greenback has been the unquestioned leader in international finance, with more than half of global foreign exchange reserves held in US Dollars.
But the dollar’s days as the de facto global currency may be numbered, according to some economists. The BRICS nations – a bloc originally consisting of Brazil, Russia, India, China and South Africa – have been quietly pushing for a new currency regime for years. Though the US Dollar remains strong, its grip on global finance is slowly weakening amid a wave of de-dollarization. The BRICS nations have been a driving force in this trend, with each of the bloc’s members introducing initiatives to reduce their dependence on the US Dollar.
With the summit solidifying the admission of six new member countries – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and United Arab Emirates – the BRICS bloc now holds a formidable presence in the global economy. These new members bring to the table large capital reserves and expertise in finance, something that experts say could cement the bloc’s position in international finance and position the BRICS nations as a major counterweight to American influence.
Given BRICS leaders renewed commitment to a new Bretton Woods-style financial order and their increasing power in global finance, the US Dollar’s long-held dominance may be facing its biggest challenge yet. But today, it’s not just a question of currency dominance — it’s a matter of who will control the future world economy. Could the BRICS nations be the ones to dethrone the US Dollar and rewrite the rules of international finance? The answer shouldn’t come as a surprise.
The US Dollar’s Global Dominance
The US Dollar has been the go-to currency for international transactions since World War II, following the signing of the Bretton Woods Agreement in 1944. The agreement, which established the US Dollar as the world’s reserve currency, set up the international monetary system that would dominate global finance for decades. With countries’ currencies pegged to the US Dollar, the greenback became the unquestioned leader in global finance and the default currency for all international trade. The dollar’s “exorbitant privilege“, as it’s been called by economists, has allowed the US government to borrow money cheaply and finance spending, while other countries had to maintain large foreign exchange reserves to protect against currency volatility.
When the agreement was first signed, the dollar was backed by gold, with countries allowed to exchange their US Dollar holdings for gold at a fixed rate. Fearing a repeat of the “beggar thy neighbor” policies of the 1930s, a system was established to ensure that currency stability and convertibility would be maintained. But by the 1970s, the gold-dollar standard had become increasingly untenable and the Bretton Woods agreement was eventually abandoned and replaced by a free-floating currency.
The Nixon Shock of 1971 marked the beginning of a new era in global finance, severing the US Dollar’s link to gold and ushering in an era of fiat currencies. With the US Dollar no longer tied to gold, it was free to fluctuate with the market and take on its own value, opening up a wave of speculation and speculation-driven currency manipulation. The greenback quickly became the default currency for international transactions, with more than 70% of global foreign exchange reserves held in US Dollars by the turn of the 21st century.
While the US still occupies a privileged position in global finance with about 90% of all international transactions still denominated in US Dollars today, its grip on the world economy is slowly weakening. Today, the greenback’s market share has fallen to 59%, a trend that experts say could continue as the BRICS nations chip away at its dominance. As concern about dollar volatility and US monetary policy mounts, countries around the world have begun to look for alternatives – and the BRICS nations are leading the charge.
The Rise of the BRICS Nations
The emergence of a resurgent BRICS bloc, with its own currency ambitions and rapidly growing capital reserves, might represent the greatest challenge yet to the US Dollar’s de facto monopoly on global finance according to experts like James Sullivan, former White House economic advisor. From a little over a decade ago, when the bloc first emerged on the global stage, the BRICS nations have quickly grown in stature and influence. Their combined GDP has more than quadrupled to $30.75 trillion as of August, representing nearly a third of the world’s total output and more than the United States and Japan’s combined.
Though still far behind the dollar in global finance, the BRICS nations have made impressive strides in recent years, launching a slew of new initiatives geared towards de-dollarizing their economies. From swap lines designed to facilitate bilateral trade in local currencies, to the creation of a new interbank payments system and the launch of a joint development bank, each member nation has taken steps to reduce its reliance on the US Dollar.
In response to the 2022 sanctions that froze over half of their foreign exchange reserves in US Dollars, Russia has shifted more of its reserves to the euro and the Chinese yuan while India has been stockpiling gold as a hedge against US currency manipulation. During August’s summit, Brazil’s president called for the creation of a common currency that “increases [their] payment options and reduces [their] vulnerabilities” — a move that could be the first step towards a dual world currency system with the US Dollar and BRICS bloc’s common currency vying for dominance. In China, officials have already begun laying the groundwork for a yuan-based alternative to the SWIFT payments system, creating an independent network that could one day rival or even replace its American counterpart. At the same time, China’s central bank has been quietly amassing gold reserves as part of a bid to establish the yuan as an international reserve currency and move away from the US Dollar.
And now, with the inclusion of Saudi Arabia, the world’s foremost oil exporter, next to Russia, the UAE, and Iran, the BRICS bloc unites some of the world’s largest oil producers and major emerging economies under one banner. With its vast financial resources and growing economic clout, the bloc could become a major counterweight to US influence and an attractive alternative to the US dollar-centric international financial system. As the BRICS nations take their place at the table of global finance, the world could soon witness a seismic shift in the balance of power and the beginning of a new era of multi-polar global finance.
The Future of Global Finance
The BRICS nations have made clear their ambitions to challenge the US Dollar’s global preeminence and create a more equitable international economic system. But what does this mean for the future of global finance? Will we see a dual world currency system in which the US Dollar and BRICS bloc’s common currency coexist? Or will the BRICS nations eventually supplant the US Dollar as the primary global reserve currency and become a counterweight to American economic power?
Many economists argue that the future of global finance depends on the BRICS nations’ ability to create stable, investment-grade currencies. The ruble, yuan, an Indian rupee, and the rest of the BRICS nations’ currencies have yet to be fully accepted as a safe-haven asset or an alternative reserve currency to the US Dollar, however, with the emergence of a unified BRICS currency, this could eventually change.
At present, the US Dollar remains firmly entrenched as the leading global reserve currency and its influence over international finance is unlikely to be challenged in the near future. But as the BRICS nations continue to grow in economic and political strength, the world could soon be on the cusp of a new era in global finance – one where the US Dollar no longer enjoys its unchallenged sovereignty.
Should the greenback lose its preeminence in the years ahead, the US could see its economic power and international standing severely diminished in a world where dollars are no longer king. And according to economists, any material decline in demand for US Dollars could cause a spike in inflation, increased borrowing costs, and a devaluation of the dollar – all of which could have far-reaching implications for the American economy.
A Return to Sound Money?
With China and Russia continuing to their feverish gold-buying spree, speculation of the BRICs nations transitioning to a gold-backed currency have surfaced in recent months. Such a move would mark a return to the gold standard that underpinned global finances for centuries prior to the 20th century. Though not without its critics, a move away from fiat currencies and towards a gold-backed system could limit the central banks’ ability to create money out of thin air – and thus, help prevent runaway inflation and currency debasement.
At the same time, a gold-backed system would also require a significant increase in global gold reserves, an effort that the BRICS nations appear to have already begun. China increased its gold reserves by 23 tons in July, the ninth consecutive month of increases while Russia added an all-time record of 50 tons of gold bars to its coffers in 2022. Between them, China and Russia now hold more than 4400 tons of gold in their official reserves, while India and Saudi Arabia have also been quietly amassing gold reserves in recent months.
With the US dollar losing its international appeal and the BRICS nations taking steps towards de-dollarization, gold has emerged as a favored asset for central banks across the globe. Gold now accounts for 15% of foreign exchange reserves, up from 11% a half-decade ago, and is poised to rise even further as central banks continue their gold-buying spree. Only time will tell what the future holds for global finance, but one thing may be clear – gold is back in a big way.
If you are concerned with the dominance of the dollar on the global stage, then it may be time to discover the power of physical gold and silver.
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