What's happening with the US Dollar? Is it losing its dominance?

Growing alliances between countries attempt to Ditch US Dollar! 

Several countries are forming alliances in order to reduce their reliance on the US dollar, primarily to reduce the impact of US economic policies on their economies and to limit US influence across the globe. As part of an international trade strategy, alternative currencies, such as the Chinese yuan or euro, are being used more extensively. As another means of decreasing their reliance on the United States and ditch US dollar, some countries are considering developing their own digital currencies.

How BRICS Is Coming Together To Ditch US Dollar？ 

BRICS, an acronym for five of the top emerging economies in the world—Brazil, Russia, India, China, and South Africa—has been getting increased attention lately for its initiative to develop a common currency to replace the US Dollar. This proposal has emerged in response to the Federal Reserve‘s decisive actions in raising interest rates, which have had an adverse impact on other countries’ currencies. 

The BRICS nations are striving to portray themselves as representatives of the Global South and present a distinct model compared to the G7, an unofficial gathering of leaders from the most developed economies worldwide that was established in 1975. The members of the G7 include Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, as well as the European Union.  

As per recent data, starting from 2020, the BRICS countries collectively contribute more towards the global Gross Domestic Product (GDP) than the G7 developed nations, taking into account purchasing power parity (PPP).

During the BRICS Business Forum, Russian President Vladimir Putin announced that the member states were collaborating to create a new global reserve currency, which is expected to include the national currencies of BRICS countries as an alternative to the International Monetary Funds SDR. The main impetus for this initiative comes from Russia and China, who are leading the charge to reduce their dependence on the US dollar and protect their interests in the face of potential sanctions.  

Brazil, India, and South Africa have also expressed support for the idea of altering the global financial system and increasing the use of local currencies in international trade. All BRICS members have taken steps to de-dollarize their economies and improve their autonomy in the global financial system. 

The primary motivation behind creating an SDR-like basket currency for BRICS nations is to challenge the dominance of the US dollar and establish a currency that reflects their sphere of influence. However, it is uncertain whether all BRICS members are willing to transfer their foreign reserves to develop this new sphere of influence.

While de-dollarization is a shared interest among BRICS nations to diversify and mitigate the risks of currency shocks caused by the US dollar, the over-reliance on the US dollar presents significant obstacles that may impede the realization of this vision. Check Which Major Forex Currencies Performed Well In 2022 to gain more insight into the foreign exchange market! 

Argentina and Brazil to ditch US dollar with joint currency 

The new Brazilian President Luiz Inacio Lula da Silva and Argentine leader Alberto Fernandez have expressed their desire to “accelerate talks on a South American currency” in a joint statement. Their aim is to create a shared unit of value for financial and trade exchanges, which would reduce the dependence on the US dollar.  

President Lula, who has embarked on his first overseas trip to Buenos Aires, has confirmed that early discussions will focus on establishing a common currency for bilateral trade. The proposed plan involves the coexistence of the Brazilian real and the Argentine peso, with the new tender intended for trade transactions between various Latin American nations. 

China & Brazil strike deal to ditch US dollar for trade 

On 30-Mar-2023, the Brazilian government announced that China and Brazil had come to an agreement to trade using their own currencies instead of using the U.S. dollar as an intermediary. With this deal, the two countries can directly exchange their currencies – yuan for reais and vice versa – for their extensive trade and financial transactions.  

The aim of the agreement is to lower costs, enhance bilateral trade, and ease investment between the world‘s second-largest economy, China, and the largest economy in Latin America, Brazil. The bilateral trade between China and Brazil totaled a record $150.5 billion last year, making China Brazil’s biggest trading partner.  

The announcement of the agreement follows a preliminary agreement made in January and was disclosed after a high-level China-Brazil business forum in Beijing. The Industrial and Commercial Bank of China and Bank of Communications BBM will carry out the transactions. It is worth noting that China has similar currency deals with other countries, such as Russia and Pakistan.

Saudi Arabia is ‘Open’ to trading in currencies beyond the US dollar 

During the Davos conference in January, Mohammed Al-Jadaan, the Finance Minister of Saudi Arabia, surprised journalists by stating that his country was willing to trade in currencies other than the US dollar for the first time in almost 50 years. This announcement is indicative of a global trend toward reducing dependence on the US dollar.  

Currently, oil sales worldwide are priced in US dollars, with China being the largest consumer of Saudi Arabia‘s crude exports. If Saudi Arabia were to adopt the “petroyuan”, it could weaken the US dollar’s position as the worlds reserve currency.  

Al-Jadaan emphasized that Saudi Arabia values its strategic relationship with China and the US and is keen to foster similar relationships with other countries, including those in Europe.

India to ditch US dollar in cross-border trade 

India has announced its latest foreign trade policy aimed at de-dollarization and has opted to offer its currency, the Indian Rupee (INR), as an alternative to the US dollar for trade purposes. The Reserve Bank of India has allowed the settlement of international trade in INR, which will be used in countries facing a shortage of the US dollar or currency failure. 

The Ministry of External Affairs has announced that trade between India and Malaysia can now be settled in INR. The goal of the new trade strategy is to encourage the internationalization of the rupee and to increase Indian exports of goods and services to $2 trillion by 2030. Bangladesh has also recommended using INR for trading with India, and Russia has made INR trade a centerpiece of its new plan to secure a global status for the currency. Currently, India is trading in rupees with Russia, Mauritius, Iran, and Sri Lanka. 

Chinas Yuan surpasses the US dollar as a most-traded currency 

In Russia, the yuan has now overtaken the US dollar as the most traded currency as of April 4, 2023. This shift in currency dominance comes a year after the West imposed sanctions on Moscow following the invasion of Ukraine. The yuan surpassed the dollar in terms of monthly trading volume in February, and the gap widened in March, based on daily transaction reports from the Moscow Exchange compiled by Bloomberg. 

This change is due to additional sanctions this year, which affected the few banks in Russia that still had the ability to make cross-border transfers in currencies of countries branded as “unfriendly” by the Kremlin. The Finance Ministry converted its market operations to the yuan earlier this year, and the national wealth fund now holds 60% of its assets in yuan.  

The Bank of Russia has been urging citizens and companies to move their assets into rubles or “friendly” currencies to avoid the risk of having them blocked or frozen. Despite these efforts, the dollar had remained the most popular currency on the Russian market until now, only occasionally losing out to the yuan in terms of trading volume on any given day, according to exchange data compiled by Bloomberg. 

Yuan tops Euro as Second Currency in Brazilian foreign reserves 

A recent central bank report showed that the Chinese yuan has surpassed the euro as the second most significant currency in Brazilian foreign reserves, indicating the strengthening economic ties between Brazil and its major trading partner, China. Be aware of the Central Bank Policies that Affect your Trading!

The yuan‘s presence in Brazil’s foreign reserves was previously nonexistent until 2018 but now accounts for 5.37% of the central bank‘s holdings at the end of 2022, exceeding the euro’s share of 4.74%. Although the U.S. dollar remains dominant, making up 80.42% of Brazils total foreign reserves in 2022, China and Brazil have taken steps to reduce its dominance by establishing yuan clearing house arrangements to facilitate bilateral trade and investment.  

Given that China is Brazils primary purchaser of exports such as iron ore, soybeans, meat, sugar, and pulp, the Brazilian central bank noted no significant changes in the composition of its portfolio compared to the previous year, as it had attempted to diversify its strategic allocations, including increased exposure to yuan and gold. 

Kenya President Urges Country to Ditch US Dollar 

President William Ruto of Kenya is urging both citizens and investors to consider divesting from their holdings of US dollars due to its rapid depreciation caused by global factors such as the Russia-Ukraine conflict. He also stated that the market will soon shift within a few weeks. 

In order to lessen the demand for foreign currency, President Ruto has introduced measures allowing oil importers to purchase oil using the Kenyan shilling instead of the US dollar. Moreover, the Kenyan government is working with the Central Bank of Kenya to implement reforms in the foreign exchange market, which will help the country regain its control over its currency market. 

De-dollarization is gaining momentum! 

For many years, the US dollar has been the dominant currency in global trade, shaping the worldwide economic environment. However, recent developments suggest that the US is no longer viewed as socially or economically stable as it was a decade ago. As a result, more countries are looking for alternative financial systems to shield themselves from the US governments tendency to use sanctions as political leverage. 

This has resulted in a recent acceleration towards “de-dollarization” in emerging markets.  

• According to media reports, on April 1, the Indian Ministry of Foreign Affairs announced that India and Malaysia had agreed to settle trade in Indian rupees.  

• India and Russia were also previously pushing for a local currency settlement mechanism to move away from the US dollar.  

• Brazil announced on March 29 that it had reached an agreement with China to no longer use the dollar as an intermediate currency but instead settle trade in local currencies. This means that all the BRICS countries, except for South Africa, have significantly begun to use local currency settlement as an alternative to dollar settlement in trade.  

• On January 18, South Africa‘s Minister of International Relations and Cooperation Naledi Pandor publicly stated that the country was studying how the BRICS countries could help establish a fairer currency trading system to challenge the dollar’s dominance. It is clear that the “de-dollarization” of trade settlement promoted by the BRICS countries, which are the main force in emerging markets, has become a trend. 

• On March 28, the Meeting of ASEAN Finance Ministers and Central Bank Governors in Indonesia discussed reducing dependence on the US dollar, euro, yen, and pound in financial transactions and shifting toward local currency settlement. Indonesian President Joko Widodo has urged the use of domestic credit cards and a shift away from foreign payment systems to safeguard against geopolitical disturbances, pointing to the sanctions imposed by the US, EU, and their allies on Russias financial sector due to the conflict in Ukraine. 

• Countries in the Middle East, such as Saudi Arabia and the United Arab Emirates, are also attempting to diversify the settlement currency in the oil trade. These can all be viewed as emerging markets new trends in currency localization over time. 

The ongoing trends indicate that the currency system is becoming more influenced by geopolitics, as evidenced by the different currency settlement efforts. Over time, the US may resort to utilizing financial sanctions and other tactics to exert its power, but these actions could ultimately lead to a decline in the international standing of the dollar as a dominant currency. 

Understanding the economic data and how it affects exchange rate movement is crucial for avoiding costly mistakes when trading currencies.

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