More and more countries dump the dollar: Will a new BRICS currency replace the US dollar for trade?

The BRICS countries, which consist of Brazil, Russia, India, China, and South Africa, are working on a common currency to challenge the dominance of the US dollar and counter Western sanctions, as Moscow and Beijing have called for de-dollarization. This de-dollarization movement has gained momentum in recent years, particularly since the outbreak of the Russia-Ukraine war in February, and has been further bolstered by Alexander Babakov’s recent statement that the BRICS nations are creating a new payment system that is not tied to the dollar or euro.

De-dollarization refers to reducing the US dollar’s dominance in global markets and substituting it with other currencies. The US dollar became the official reserve currency of the world in 1944, giving the US a disproportionate amount of influence over other economies. However, countries like Russia and China would like to reduce dollar hegemony to achieve foreign policy goals. This process involves substituting the US dollar as the currency used for trading oil and/or other commodities.

This move has been gaining speed in the last few years, with central banks holding less of the US dollar as reserves. The decline in the US dollar’s share has been in two directions: a quarter into the Chinese renminbi and three-quarters into the currencies of smaller countries. Countries such as India and China have been trading with each other in their own currencies, triggering talk of de-dollarization of the international trading order. The Indian rupee has the potential to become one of the global reserve currencies in the world, according to noted economist Nouriel Roubini.

The BRICS countries – Brazil, Russia, India, China, and South Africa – are reportedly considering creating a new currency to facilitate trade, which could be seen as soon as August when the countries meet for their annual summit in South Africa. Russia is said to be behind the idea as it has faced economic sanctions from the West over its invasion of Ukraine. The creation of a common currency, possibly a digital ruble or Indian rupee, would be beneficial for Russia and India, while China’s involvement would add 1.4 billion participants to the system. Brazil has already started accepting trade settlements and investments in yuan, indicating a move towards de-dollarization.

The potential creation of a new currency by the BRICS nations could have positive implications for their economies, including increased consumer confidence, spending, and growth for investors. However, it is unclear if India will accept the new currency and align with China, with whom it currently has tensions. Additionally, some experts believe that China may benefit more from the new deal than India. Regardless, it is certain that the power of the dollar is decreasing.

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