Is this the major threat to the dollar?

Opposition to the dollar is growing in the emerging world. Countries such as China, Brazil and Russia would rather not use the US currency for mutual transactions. However, the introduction of a separate Brics coin is still a distant future.

In the first decade of this millennium, the so-called Brics countries stole the show economically. India and China in particular saw the economy grow at lightning speed, thanks to a booming export sector, large government investments and increasing local consumption. This growth was a nice stimulus for major exporters of raw materials, such as Brazil, Russia and South Africa. The so-called Brics company joined forces. In 2009, the five met in Yekaterinburg to see how they could best defend common economic interests. Last week, the fifteenth round of consultations took place in Johannesburg, South Africa. The participants agreed on one subject: we need to get rid of the dollar as soon as possible.

Together against the dollar
Emerging countries account for about 60% of the global economy. But in foreign exchange markets they do not play any significant role. According to research by investment bank Goldman Sachs, the US dollar is involved in 42,6% of all foreign exchange transactions. For example, this is 31,7% for the euro and 6,5% for the pound. In this ranking, the Chinese renminbi, as the first emerging currency, only ranks fifth with a share of only 2,5%. The introduction of a common currency should change that. Brazilian president Lula da Silva has already suggested developing a special Brics coin. In practice, however, it is impossible to coordinate the monetary policies of the various countries. If only because the Brics group was expanded with six new countries at the meeting.

Brics coin? Try the sur first
It is not the first time that Lula has opposed the dollar. He previously proposed a separate currency to handle trade in Latin America. Together with Argentina, a name had already been devised for the currency: the sur. However, the introduction is difficult because the economic differences between the two countries are enormous. Brazil, for example, has foreign currency reserves of about $300 billion. On the other hand, without support from the International Monetary Fund, Argentina would have gone under financially long ago. And while Brazil's independent central bank manages to bring inflation under control, the neighboring country is completely out of control with inflation exceeding 100%.

Small fist against the US currency
Although trade between emerging countries is growing strongly, the vast majority of exports to the developed world are disappearing. And that's all done in dollars. But in one respect, the Brics already seem to be making a small fist against the US currency. The dollar makes up about 59% of central bank currency reserves in the Brics world, up from 2015% in 66. From the Brics perspective, it would be a good step to convince emerging countries to hold more Chinese renminbi or Brazilian real as reserves. But as long as the focus is on hopeless initiatives like a Brics coin, the dollar world has nothing to worry about.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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