Is There a Threat to the Dollar From a New BRICS Currency? 

Over the past year, we’ve received numerous questions about the effort of BRICS countries (Brazil, Russia, India, China, and South Africa) to develop their own currency that would rival the U.S. dollar. Many have wondered: at what point should we be worried about this? Is the dollar truly under threat of no longer being the world’s major currency?  

This isn’t the first time that investors have wondered what would happen if the dollar lost its preeminent spot in the global financial system. A quarter century ago, many investors worried whether the rise of the Euro would displace the dollar, and one can find episodes of hand-wringing much further back.  

First off, what is BRICS? 

The original BRICS countries began as a somewhat informal bloc of large emerging market economies, but has since become a more formal group that periodically gathers at international summits to coordinate investment/geopolitical initiatives. Recently, the bloc has formally expanded to include additional countries; in January of 2024, Egypt, Ethiopia, Iran, and the United Arab Emirates joined the group. Saudi Arabia is a notably active participant in the organization as well.  

What is this news of a BRICS Currency?  

The latest bout of concern about the U.S. dollar emerged because a number of these BRICS countries are considering a plan to create a new reserve currency that they could use for international trade. Currently, many of these countries – even those that are perennial international rivals of the U.S. – are forced to use the dollar to trade internationally.  

A BRICS currency is of interest not just because of the size of the countries in question, but because several of its members are countries that are facing some sort of financial conflict with the United States. Russia and Iran have faced numerous sanctions in recent years, and China and the U.S. have faced deteriorating trade relations that burst into a period of open trade warfare. Part of their motivation for favoring a BRICS currency is to make it easier to escape the reach of U.S. sanctions and U.S. financial pressure. 

Will this currency actually materialize?  

It’s not a foregone conclusion that the countries involved can pull this off. Although the countries have some similar interests and may like the idea of an international currency over which they have more control, in practice they have very different economies.  

India’s population is still growing rapidly, for example, while Russia’s population is shrinking. China is a manufacturing powerhouse, the Middle Eastern countries are energy exporters, and Brazil is an agricultural breadbasket. Even if they would all prefer an alternative to the U.S. dollar, these aren’t necessarily countries that otherwise have overlapping interests when it comes to their currencies.  

Nor are they countries that have stalwart track records when it comes to currency management. Not to say that the U.S. has always managed inflation particularly well, but it hasn’t had the instability and currency crises that have plagued many emerging markets over the years. 

Who else would use it?  

Even if BRICS countries managed to coalesce around a new currency, the question would be who else in the world would sign up? While it’s true that BRICS countries in aggregate make up a significant share of global GDP, 27% according to the World Bank, economic strength alone is not what makes the U.S. dollar dominate.¹ Financial transparency, price stability, and market development are all other vital components to international adoption of a currency.  

When looking closely at BRICS countries, the developed world has numerous concerns around financial transparency, but also extending further to data integrity, rule of law, and human rights violations. These factors heavily contribute to low overall trust, and ultimately low adoption rates of the individual BRICS country currencies in existence today. Needless to say, these concerns would not be remedied by simply creating a new currency.  

Regarding price stability, generally a central bank is needed to foster and support stability by buying or selling its own currency in foreign exchange markets. Being that BRICS countries don’t have a shared central bank, and it is rumored they may back a new currency with gold, price stability will be very hard for them to achieve. It’s important to remember that the United States abandoned the gold standard for the U.S. dollar in 1971 because it increased currency volatility and limited the government’s ability to implement effective monetary policy.  

Lastly, market development is something that takes many years to achieve and is likely the biggest hurdle for any future currency to threaten the U.S. dollar. As background, the U.S. dollar has been entrenched into the global financial system ever since Bretton Woods was established at the end of WWII in 1944. This was a collective international payment system that officially made the U.S. dollar the global reserve currency and pegged most other global currencies to the dollar.  

Even after the collapse of the Bretton Woods system in the 1970s, commodity prices globally are priced and traded in U.S. dollars, and many countries still either peg their currency to the dollar or have even adopted it as their own currency. In looking at foreign currency transactions globally in 2022, the dollar was involved in over 88% of all global transactions according to data from the Bank of International Settlements.² 

If the BRICS currency takes off, is it a threat?  

Although it appears to be a long road ahead for a new BRICS currency to become a threat, at some point a new currency could become large enough that it would start to impact the U.S. dollar. If many countries began to use an alternative currency for their international trade, eventually the dollar would likely lose some of its value due to reduced demand. 

But how much risk is there? A few statistics are worth keeping in mind in this regard. 

First, the U.S. economy makes up more than 25% of global economic output by itself. The European Union another 17% or so. When you add in countries like Canada, the United Kingdom, Australia and Japan, it easily remains the case that the U.S. and its close allies represent nearly half the global economy.³ 

Second, the U.S. has an enormous international currency lead that would take a long-time to erode. According to data from the International Monetary Fund, about 60% of global central bank reserves are held in U.S. dollars, followed by 20% in Euros.⁴ While it’s true that this share of dollar reserves has decreased slightly in recent years, it’s worth noting that this is at least partly due to a regulatory change of how gold is categorized by the Bank of International Settlements. In 2019, gold was affectively deemed to be less risky than its previous asset categorization suggested according to Basel III framework. This has caused central banks to recalibrate and slightly diversify their pool of reserves.⁵ 

Key takeaways: 

New BRICS currency a likely non-factor for U.S. investors. Although this development is a potential geopolitical headache for the U.S., if the adoption is primarily limited to BRICS countries for trade amongst themselves, it would likely not materially impact the demand for U.S. dollars. It would instead require widespread adoption from other developed economies before a BRICS currency would truly threaten the status of the dollar. 

It is very unlikely for now that foreign developed economies would trust or rely on a new BRICS currency. The major European powers, Japan, Canada, Australia, and so forth, largely share many of the same concerns as the U.S., when it comes to BRICS countries, due to past currency manipulation and governance issues in those countries. 

A weaker U.S. dollar wouldn’t necessarily be a bad thing for the U.S. economy. As investors, we naturally care if the U.S. economy suffers as a result of changes in the geopolitical environment. But even if a BRICS currency did become a widespread international success – which as noted is a long-shot – a somewhat weaker dollar tends to help U.S. manufacturers by making them more competitive globally, helps attract tourists to the U.S., and has other effects that aren’t entirely negative.  

Investors should remain diversified. Potential changes like this in the global financial system are why it’s important for U.S. investors to maintain diversified exposure to international equities, as well as to fixed-income that’s denominated in non-USD currencies. There is always a possibility that a currency other than the dollar, or an equity market outside the U.S., will have a period of outperformance and the best way to prepare for that possibility is to remain diversified both across asset classes and across countries. 

Not a Mercer Advisors client but interested in more information? Let’s talk. 

 

1. World Bank. “National Accounts Data.” The World Bank Group, 2024, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD

2. McGuire, Patrick. “Triennial Central Bank Survey of foreign exchange and Over-the-counter (OTC) derivatives market in 2022.” The Bank for International Settlements. October 27, 2022.

3. World Bank. “National Accounts Data.” The World Bank Group, 2024, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD

4. Arslanalp, Serkan, et al. “Dollar Dominance in the International Reserve System: An Update.” The International Monetary Fund. June 11, 2024.

5. Bank for International Settlements. “Basel III: international regulatory framework for banks.” Bank for International Settlements, accessed October 3, 2024.