A study by ING Group suggests that the dominance of the dollar in global trade appears to be challenged by the BRICS alliance. Meanwhile, discussions about a currency union have attracted much attention ahead of the BRICS summit next week. The BRICS alliance, consisting of Brazil, Russia, India, China, and South Africa, represents about a quarter of the global economy and 41.9% of the world's population.
ING analysts Chris Turner, Dmitry Dolgin, and James Wilson noted in a report that the topic of 'de-dollarization' may gain attention during the upcoming BRICS leaders' meeting. The economic expansion of BRICS countries could determine the speed at which they adopt a business and financial system outside of the dollar, thereby posing a certain challenge to the dollar's dominance as an international currency.
Over the past year, several countries or economies have intensified their criticism of Washington's "weaponization" of the dollar, citing the freezing of Russian central bank assets, expulsion from the Swift global payment system, and the prohibition of Moscow's use of the dollar by Western countries.
In recent months, the calls for de-dollarization seem to be growing louder, such as when Brazilian President Luiz Inacio Lula da Silva openly called for settlements in local currencies rather than the dollar in April.
Last month, Alexander Babako, Deputy Chairman of the Russian State Duma, stated that Russia is leading the development of a currency union to facilitate cross-border trade among several developing countries. This currency union involves an intergovernmental agreement where two or more countries use the same currency.
As a new global currency, it is hoped to become a Euro-like currency used by non-Western countries. However, Reuters quoted South African officials saying that a currency for the BRICS four countries is not on the agenda for next week's meeting. Additionally, the increasing use of the yuan in trade settlements, international payments, and foreign exchange transactions might also hinder the currency union among BRICS nations.
The People's Bank of China, in its quarterly monetary policy report last Thursday, vowed to promote the internationalization of the yuan, further expand its use in cross-border trade and investment, and develop its offshore market. Moreover, the accelerating diversification of foreign exchange reserves by more economies also promotes the share of the yuan in the international trade and reserve system.
Bilateral currency swap agreements established by the Chinese central bank with various countries since 2009 serve as a "landmark example" of the world needing to challenge the dollar's international role in trade pricing to reduce dependency on it.
According to ING data, the dollar's share in global foreign exchange reserves fell to 58.6% in 2022, reaching the lowest point since data were first recorded in 1995. The bank suggests that de-dollarization is mainly reflected in the international reserves of central banks, with the dollar seemingly being replaced mainly by Asian currencies such as the yuan and the yen in the long term.
Despite the growing number of countries moving towards "de-dollarization" and the gradual decline in the dollar's share in trade and reserve systems, neither the yuan nor other currencies such as the yen are as attractive to private investors or investment institutions as the dollar. Data shows that the dollar's share in global foreign exchange reserves slightly climbed to 59.2% in the first quarter of 2023. In the external debt of banks and non-bank sectors, the shares of the dollar remained at 48% and 51%, respectively.
Moreover, in recent years, the yuan's proportion in international assets outside central bank reserves only rose from 5% to 6%, while the dollar's proportion was 49% last year. ING indicates that factors such as relative lack of liquidity, concerns about capital controls, and risks of exchange rate intervention may hinder the development of other currencies in trade and reserve systems. Both the yen and the yuan share one or several of these concerns.
