How Would a New BRICS Currency Affect the US Dollar?

The BRICS nations—comprising Brazil, Russia, India, China, and South Africa—are actively exploring the creation of a new reserve currency backed by a basket of their respective currencies.

Currently undergoing evaluation and development, this possible currency seeks to challenge the US dollar-dominated international financial system and declare economic independence (around 90% of all currency trade is made using the US dollar

Why the Interest in a New Currency?

The BRICS countries have several compelling reasons for pursuing a new currency:

  1. Global Financial Challenges: Recent global financial crises and aggressive US foreign policies have prompted the BRICS nations to seek alternatives. They aim to better serve their own economic interests while reducing reliance on the US dollar and the euro.
  2. Economic Independence: Establishing a new currency allows these nations to assert their economic sovereignty and reduce dependence on external monetary systems.

Progress and Developments

During the 14th BRICS Summit held in mid-2022, Russian President Vladimir Putin expressed the group’s intention to issue a “new global reserve currency” and emphasized their readiness to collaborate openly with fair partners. Brazilian President Luiz Inacio Lula da Silva also voiced support for a BRICS currency, questioning why the dollar remains the dominant trade currency after the end of the gold standard.

It’s important to remember that the creation of an alternative currency is a medium- to long-term goal, and that there isn’t an official strategy in place to establish a BRICS currency at this time 

Potential Impact on the US Dollar

The potential impact of a new BRICS currency on the US dollar remains uncertain, with experts debating its ability to challenge the dollar’s dominance. However, consider the following scenarios:

  1. Weakening US Sanctions: If the BRICS currency stabilizes against the dollar, it could weaken the power of US sanctions. As more countries adopt the new currency for international trade, the effectiveness of US sanctions may decline.
  2. Reduced Demand for the Dollar: Should the BRICS nations successfully establish a new reserve currency, it would likely lead to a decline in demand for the US dollar. This shift could have significant implications for both the US and global economies.
  3. Return of Dollars to the US: One of the most significant impacts would be on the US economy.Billions of dollars could flow back to the US if poor nations start using the BRICS currency more frequently for international trade, which could have an impact on liquidity and investment dynamics.

In summary, while the emergence of a BRICS currency poses challenges and uncertainties, its potential implications for the US dollar warrant close attention from investors and policymakers alike. The global financial landscape may change significantly if the BRICS alliance continues its discussions, which might affect the dollar’s status as the world’s main reserve currency.

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