BRICS currency and de-dollarization

US President-elect Donald Trump has issued a strong warning to BRICS countries, threatening to impose 100% tariffs on them if they create or support any currency that could challenge the US dollar's dominance. Trump’s statement suggests that if BRICS countries attempt to weaken the dollar's position, they could lose access to the US market—making it difficult for them to export goods to the US.

Background on US Dollar Dominance:

• After World War II, the Bretton Woods Agreement (1944) established the US dollar as the central currency for global trade. This system initially pegged the dollar to gold, and other currencies were linked to the dollar.
• Though the gold standard ended in 1971, the dollar continued to dominate because of its stability and trust.
• The US dollar became the world's primary reserve currency, with over 58% of global foreign exchange reserves held in dollars.
• In the 1970s, the US made deals with oil-exporting countries (especially Saudi Arabia) to sell oil only in US dollars. This created a constant demand for the dollar, known as the "petrodollar" system.
• Many global systems, like SWIFT (for international payments), the IMF, and the World Bank, still operate primarily in dollars.

What is De-dollarisation?

• The US dollar, which accounts for around 58% of global foreign exchange reserves, is a cornerstone of international trade and finance.
  • It is involved in nearly 90% of global forex transactions and remains the primary currency for commodities like oil. However, its share of global reserves has dropped to a 20-year low of 58%.
• De-dollarisation refers to countries reducing their dependence on the US dollar for trade, reserves, and financial transactions.
• Countries are shifting to using their own currencies or regional currencies in trade, rather than relying on the US dollar. They might also explore cryptocurrencies or other systems.
• Key aspects of de-dollarisation include:
  • Reduced use of the US dollar in trade: Countries are forming bilateral trade agreements to settle transactions in their own currencies.
  • Diversifying reserves: Instead of holding most reserves in US dollars, countries are investing in other currencies like the euro, yuan, or even gold.
  • Alternative payment systems: Countries are developing or joining payment systems that don’t depend on US dollar-dominated networks like SWIFT. For example, China's CIPS is an alternative to SWIFT.
  • Economic sovereignty: De-dollarisation helps countries protect themselves from US economic sanctions and the instability of dollar fluctuations.

Role of BRICS in De-dollarisation

• The BRICS group (Brazil, Russia, India, China, and South Africa) has been leading efforts to move away from the dollar. They have discussed creating a shared currency to facilitate trade within their group, which could reduce their exposure to US financial systems.
• At a recent BRICS summit, a symbolic banknote was introduced, but there are no immediate plans for a unified BRICS currency or for replacing SWIFT with a BRICS alternative.
• BRICS currency
  • The idea of a shared BRICS currency gained traction during the 2023 Johannesburg summit, where Brazilian President proposed a common currency to shield member states from dollar fluctuations. Advocates argue that such a currency could enhance financial stability and reduce vulnerability to external shocks.