As the BRICS bloc—comprising Brazil, Russia, India, China, and South Africa—expands and increasingly advocates for trade in local currencies and a potential BRICS common currency, the global financial landscape is poised for significant changes. The U.S. dollar, long considered the dominant currency in international trade, and European currencies such as the euro and the British pound could face growing challenges as BRICS nations shift away from dollar-dominated transactions.
With new BRICS members such as Saudi Arabia, UAE, Argentina, Egypt, Iran, and Ethiopia joining the bloc in 2024, the push to reduce dependency on the dollar in global trade has intensified. This shift could have profound implications for the dollar and European currencies, both at macroeconomic and geopolitical levels. Here’s an analysis of how the rise of a BRICS currency or an increased use of local currencies among BRICS members might impact the dollar, the euro, and other European currencies.
1. Decline in U.S. Dollar Dominance
For decades, the U.S. dollar has been the world’s primary reserve currency, accounting for more than 50% of international trade and financial transactions. However, BRICS countries have openly expressed dissatisfaction with the dollar’s dominance, citing concerns over exchange rate volatility, U.S. sanctions, and their dependence on U.S. monetary policy. If BRICS nations increasingly adopt a common currency or conduct trade in their own currencies, it could significantly erode the dollar’s global influence.
Key Factors Contributing to Dollar Decline:
- Reduced Dollar-Denominated Trade: BRICS members are major players in global trade, particularly in energy and commodities. With Saudi Arabia, Russia, and the UAE as leading oil producers, the shift away from using the dollar in oil transactions could severely impact the petrodollar system, where oil trade has traditionally been conducted in U.S. dollars. If oil-exporting BRICS members begin pricing oil in local currencies or a BRICS currency, the demand for the U.S. dollar could drop sharply.
- Alternative Payment Systems: The BRICS bloc has also discussed developing its own financial infrastructure, including a cross-border payment system that could bypass the U.S.-dominated SWIFT system. Such a system, if implemented, could further reduce the use of the dollar in international trade and weaken its position as the primary settlement currency.
- Geopolitical Tensions: Sanctions imposed by the U.S. on BRICS members like Russia and Iran have accelerated efforts within the bloc to seek alternatives to the dollar. As these countries and others seek financial autonomy, the global reliance on the dollar for international settlements and reserves could diminish.
Potential Consequences for the U.S. Dollar:
- Weakened Reserve Currency Status: If central banks globally begin diversifying away from the dollar in favor of other currencies or commodities like gold, the dollar’s role as a global reserve currency could weaken, leading to increased volatility in U.S. financial markets.
- Higher Borrowing Costs: A decline in demand for the dollar could lead to depreciation, causing higher interest rates in the U.S. to attract foreign investment. This could raise borrowing costs for the U.S. government and private sector, potentially slowing economic growth.
2. Impact on European Currencies (Euro, Pound)
While the U.S. dollar may face the most significant challenges, European currencies such as the euro and the British pound could also be affected by the rise of a BRICS currency or the use of local currencies for trade within the bloc.
Impact on the Euro:
- Euro’s Competitive Role: The euro has positioned itself as a key global currency, second only to the dollar. As BRICS countries shift away from the dollar, the euro may become more attractive as a reserve currency for some central banks. However, if BRICS nations continue to promote trade in their local currencies or create a BRICS currency, the demand for the euro in global trade could also decrease.
- Energy Market Implications: Given Europe’s reliance on imported energy—much of it historically priced in dollars—a move by BRICS energy producers to price oil in non-dollar currencies could increase volatility in European energy markets. This could also complicate European efforts to secure stable energy supplies at competitive prices, particularly as European countries seek to diversify away from Russian energy post-Ukraine war.
Impact on the British Pound:
- Reduced Influence in Global Trade: As a currency with a smaller global footprint compared to the dollar and euro, the British pound could be less affected directly by the BRICS transition. However, a reduction in dollar dominance in global trade could lead to a broader fragmentation of the global currency system, which might diminish the pound’s role as a secondary reserve currency.
- Competitive Pressure: Like the euro, the pound could face increased competition if BRICS nations create a parallel financial system or currency bloc. Any move by major BRICS members to adopt a new currency for international trade may reduce demand for the pound, particularly in commodity-rich nations.
3. Impact of a BRICS Common Currency
A key component of the BRICS bloc’s long-term vision is the possible creation of a BRICS common currency, similar to the euro. While such a move would require extensive coordination and long-term planning, the introduction of a common currency could have far-reaching consequences for the global financial system.
Benefits of a BRICS Common Currency:
- Increased Trade Efficiency: A common currency among BRICS nations would reduce currency risk and exchange rate fluctuations, fostering smoother trade within the bloc. This could further incentivize trade among BRICS countries, reducing the need for external currencies like the dollar or euro.
- Monetary Independence: BRICS countries would gain greater independence from Western monetary policies, allowing them to set interest rates and inflation targets based on their own economic conditions rather than being influenced by dollar-based or euro-based decisions.
Challenges and Implications:
- Geopolitical Fragmentation: The creation of a BRICS currency would likely deepen the divide between Western economies and the BRICS bloc, creating an increasingly bipolar financial system. This could lead to a more fragmented global trading environment, with certain countries aligning their trade with either the BRICS currency or the dollar/euro system.
- Complex Transition: The transition to a BRICS currency would be complex, as the bloc encompasses diverse economies with varying levels of development, inflation rates, and fiscal policies. Managing these differences while maintaining monetary stability could pose significant challenges to the currency’s long-term viability.
4. Shift in Global Trade Patterns
One of the most immediate effects of BRICS members using their own currencies or a common BRICS currency for trade would be a shift in global trade patterns. Non-BRICS countries, especially those that rely heavily on the dollar and euro for trade, may find it challenging to adapt to a new currency system.
- Diversification of Currency Reserves: Central banks around the world may begin diversifying their reserves, reducing their holdings of dollars and euros in favor of BRICS currencies or other alternatives like gold. This diversification could introduce more volatility into global currency markets.
- Bilateral and Multilateral Agreements: The BRICS nations are likely to sign more bilateral trade agreements using local currencies, thereby bypassing the dollar and euro entirely. This shift could lead to further isolation of Western economies, particularly in regions like Africa and South America, where BRICS influence is growing.
Conclusion
The growing trend of BRICS nations conducting trade in local currencies and the potential for a BRICS common currency poses a significant challenge to the long-standing dominance of the U.S. dollar and European currencies like the euro and pound. While these changes won’t happen overnight, the gradual reduction of dollar-based trade and financial transactions, coupled with the geopolitical ambitions of the BRICS bloc, could lead to a more fragmented and multipolar global financial system.
For the dollar and euro, the key challenge will be adapting to this evolving landscape. Both the U.S. and the EU may need to strengthen economic alliances, foster greater financial innovation, and potentially rethink their global trade strategies to maintain their influence in a world where BRICS currencies gain prominence.