According to a paper published in the Global Policy Journal, former chief Economist of Goldman Sachs (GS), Jim O'Neill, called on countries of the BRICS bloc to expand their challenge to the dollar's dominance. O'Neill is known for having devised the original BRIC acronym that led to Brazil, Russia, India, and China joining an informal grouping, adding South Africa later to complete the group as it is currently known. BRICS countries have been working together for several reasons, including monetary policy independence from the United States and other Western nations, providing an alternative to Western dominance. Referencing the latest monetary policy moves in the US, O'Neill went out to say that it was necessary to counter the dominance of the dollar to prevent "dramatic" effects on other countries. Recent moves by China to use the yuan instead of the dollar appear to be doing exactly as O'Neill suggested.
BRICS Move Away from the Dollar
China and Brazil, two developing countries of BRICS, reached an agreement on Wednesday, March 29, to trade in their own currencies and ditch the dollar as a go-between, in a move seen as another step towards rivaling US global economic dominance. China is Brazil's largest trading partner, with $150.5B in annual trade between them. The agreement is expected to help reduce currency fluctuations, encourage bilateral trade, and provide a real alternative to the dollar. Brazil is the latest to have signed a deal, with several other countries already agreeing to trade directly in yuan, including Russia and Pakistan.
In parallel, last Tuesday, March 28, France's TotalEnergies (TTE.PA) confirmed that it settled the first Liquified Natural Gas (LNG) trade through the Shanghai Petroleum and Natural Gas Exchange using China's yuan. The deal was for 65K tonnes of LNG to be imported from UAE to China and is expected to have broader implications for the global energy market. Central banks have also been moving away from holding dollars in the last year, according to the world gold council (WGC). In fact, they bought up Gold (XAU) demand at the fastest pace since records began in 1950, amounting to 862 tonnes in the second half of 2022 alone. This is seen as a move away from fiat currencies, diversifying from government-issued US dollars.(Source:NASDAQ)
Monetary Policy: The Main Issue
Arguing for de-dollarisation, the former Chief Economist at Goldman Sachs also said that the dollar plays “a too dominant role in global finance.” He pointed to negative impacts for emerging markets when the Fed embarks on extended periods of monetary policy change as countries experience monetary policy destabilisation from exchange rate fluctuations. He called for the BRICS group to expand by adding countries such as Mexico, Turkey, Vietnam, and Egypt. Some media platforms have already reported that Saudi Arabia and Iran have applied to join the bloc, and this year BRICS nations will decide whether to admit the new members.
In signing the deal to trade using yuan with China, Brazilian authorities said the move away from the dollar aimed to facilitate investment and reduce costs as interest rates have been increasing on dollar-denominated bonds. Meanwhile, it was also reported that Beijing sees the move away from the dollar as a way to insulate itself from international pressure.
Dollar’s Dominance Remains High
It's been ten years since China indicated that it aspired to make the yuan the dominant currency in trade and financial transactions and boost its use as a reserve currency. However, it is far from reaching the status of reserve choice, constituting less than 5% of global central bank holdings. The dollar still amounts to 55% of global bank savings, followed by the Euro at 20%.
Since the US broke the Bretton Woods agreement in 1973, a system that pegged the dollar's value to gold, multiple attempts have been made to create a new reserve currency to compete. The Euro was once considered a contender, but the shaky fiscal union has kept it from surpassing the dollar. The yuan has become another candidate, but its lack of market-clearing levels and security cooperation put it in doubt. However, demand for an alternative to the dollar remains strong, leading to the potential of parallel payment systems, with the US being the most important but not the only important. This would not be without precedents, as during the Cold War, there were two cross-border systems: The dollar-denominated one in the West and the Russian ruble in the USSR and client states.
A recent paper published by former Goldman Sachs Chief Economist Jim O'Neill called for a challenge to the dominance of the dollar as the reserve currency. China, in conjunction with other BRICS nations, has taken moves in this direction, including a recent deal with Brazil to use their own currencies in trade. Can other BRICS countries follow suit, and will it eventually hurt dollar dominance?