-: R Muthu Kumar :-
The dollar suffered a 2.7 per cent decline against other major global currencies in the year gone by, thus 2023 proved the dollar’s worst-performing year since the global economic downturn associated with the 2020 COVID-19 pandemic.
The currency lost ground against alternatives across Europe and Asia as it was battered by anticipation among speculators of a shift in Fed policy to cut interest rates as well as weaken global interest in dollar-denominated investments and debt as the US economy slowed down.
The drop in the dollar’s value, the biggest of its kind since 2020, when the greenback declined 5.5 per cent even as Washington pumped trillions of new dollars into the economy comes amid the ongoing tectonic transformations in the contours of the global economy as the US attempts to use its currency as a means of economic pressure against geopolitical rivals.The West’s economic war against Russia, waged via sanctions and trade restrictions, sparked realisation even among many of US’s traditional allies that their economic relationships and financial well-being were inextricably linked to American goodwill which could disappear at any moment. This realisation helped motivate half a dozen countries to join the BRICS bloc last year (Egypt, Ethiopia, Iran, Saudi Arabia, the UAE and Argentina), and prompted BRICS+ and other countries to accelerate a search for safe alternatives to the de facto global reserve currency.
The expansion of BRICS and the multi-currency order and move towards a ‘BRICS currency’ is certainly one core factor as the world trade and economic investment patterns are diversifying. The decline of the dollar is a long-term trend and we are seeing the early inception phases of this process.
The world trade for Global South countries in future will not be dictated by the American Dollar is what the experts predict. The next logical step by BRICS will be to explore prospective benefits of a stable alternative to the dollar, particularly a BRICS currency on the lines of Euro.
Dedollarisation would of course mean less space for the US to use and abuse currencies of nations for political objectives as has been their standard policy practice for decades.
When the Federal Reserve increases funds rate, it typically increases interest rates throughout the economy, which tends to make the dollar stronger.
But what is motivating investors’ expectations of the dollar continuing to lose ground is the Fed proposing to reverse course on its 21-month-long policy of increasing interest rates to try to tame inflation.
Dedollariastion will eventually happen when the gold standard for money is implemented. Countries printing money will have to correlate lesser amount of gold to back the newly printed currency.
Russia – a country with vast experience in international and regional organisations – could establish a new body in BRICS to monitor and process trade and currency handling data.
Global South nations congratulated Russia on assuming the BRICS presidency in 2024 and expressed big hopes during Russia’s tenure.
BRICS is so appealing to the nations of the Global South, as it propogates inclusiveness as a contrast to the zero-sum geopolitical machinations of Western countries.
Few changes in global order due to the changes in the role of BRICS will be the catalyst for world economy to improve.
But the million dollar question is how will advocates for dedollarization would need to show value such as cheaper trade costs and less volatility?
The international community is increasingly engaged in discussions on the likely changes in the configuration of the global financial system, with scenarios ranging from a bi-polar system dominated by the dollar-yuan duopoly and various multipolar scenarios, involving among other possibilities the creation of a BRICS reserve currency. And it is the prospect of the creation of R5 – the provisional name for the would-be BRICS currency (all BRICS currencies start with the letter “R”) – that is shifting into the epicenter of the increasingly heated global debate.
The 5 Rs are Brazilian Real . Russian Rubble, Indian Rupee, China’s Renminbi and South Africa’s Rand.
Admittedly, the creation of a common BRICS currency will not be done with a magic wand that solves all economic woes of the Global South. But the launching of a common currency project may act as a disciplining mechanism that improves the quality of economic policy.
