BRICS’ currency coup: Can Yuan and gold redefine global finance?

• China’s Yuan gaining momentum over the U.S. dollar. 
• Member countries favoring gold over king dollar
• Dollar remains king, but a shift is happening.

Is BRICS currency cooperation about immediate de-dollarization or long-term financial sovereignty? The question is poised by Christopher Whalen writing for China Daily. His analysis, ‘BRICS currency creates dilemma for the dollar’ dives into the nooks and cranny of how the very concept of a BRICS currency is already causing havoc for the dollar, literally speaking at least.

Let’s us first define de-dollarization; “In short, de-dollarization entails a significant reduction in the use of dollars in world trade and financial transactions, decreasing national, institutional and corporate demand for the greenback,” explain experts from J.P Morgan, a US based global finance and banking leader.

In a more detailed explanation, Luis Oganes, head of Global Macro Research at J.P. Morgan explains that; “The concept of de-dollarization relates to changes in the structural demand for the dollar that would relate to its status as a reserve currency. This encompasses areas that relate to the longer-term use of the dollar, such as transactional dominance in FX volumes or commodities trade, denomination of liabilities and share in central bank FX reserves.”

You see, at the moment, (and has been the status quo for centuries) the U.S. dollar is the world’s primary reserve currency, and it is also the most widely used currency for trade and other international transactions, Oganes details.

“However, its hegemony has come into question in recent times due to geopolitical and geostrategic shifts. As a result, de-dollarization has increasingly become a substantive topic of discussion among investors, corporates and market participants more broadly,” he acknowledges.

In a report titled ‘De-dollarization: Is the US dollar losing its dominance?’ published this month by J.P. Morgan, the analyst cautions that; “There are two main factors that could erode the dollar’s status.”

He first cites adverse events that he says could “…undermine the perceived safety and stability of the dollar and the U.S.’s overall standing as the world’s leading economic, political and military power.”

“For instance, increased polarization in the U.S. could jeopardize its governance, which underpins its role as a global safe haven. Ongoing U.S. tariff policy could also cause investors to lose confidence in American assets,” he warns.

Then secondly, he cites positive developments outside the U.S. that boost the credibility of alternative currencies such as economic and political reforms in China.

“A candidate reserve currency must be perceived as safe and stable and must provide a source of liquidity that is sufficient to meet growing global demand,” explains Alexander Wise, who is in charge of Long-Term Strategy at J.P. Morgan.

Wise warns that de-dollarization could shift the balance of power among countries, and this could, in turn, reshape the global economy and markets.

“The impact would be most acutely felt in the U.S., where de-dollarization would likely lead to a broad depreciation and underperformance of U.S. financial assets versus the rest of the world,” he warns.

“For U.S. equities, outright and relative returns would be negatively impacted by divestment or reallocation away from U.S. markets and a severe loss in confidence,” he goes on to caution.

“There would also likely be upward pressure on real yields due to the partial divestment of U.S. fixed income by investors, or the diversification or reduction of international reserve allocations,” Wise concludes.

True to his analysis, recently, countries like Turkey and Iran, have been recently shifting into international currencies or local currencies, instead of the US dollar, in their foreign trade.

“This shift comes amid the US economic sanctions on Iran in tandem with its souring relations with Turkey. What is striking in this regard is that there is an international acceptance of other currencies, especially the Chinese yuan,” reports Future U.A.E. a finance consultancy firm.

Similarly, Reuters reported this week that the Yaun is gaining dominance but; “It won’t de-throne the dollar, but as cross-border yuan payments surged to a record in March, analysts say there is renewed appetite for a global yuan as aggressive tariffs shake faith in the U.S. currency and other U.S. assets.”

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BRICS, shifting away from the dollar?

The term “BRICS currency” typically refers to a hypothetical or proposed unified currency for the BRICS, a group that is growing and growing fast.

Wade, for China Daily, explains that BRICS currency is not (yet) a single, physical currency currently in use, but rather “…a concept for a potential future monetary system that some suggest will reduce the dominance of the US dollar in international trade and finance.”

At the moment, the dollar is still ‘king’ “…the dollar is involved in more than half of all trade and 80 percent of all foreign exchange transactions.” However, “BRICS currency cooperation aims to gradually reduce the group’s dollar dependency, but challenges remain,” Wade admits.

He goes on to explain that; “The BRICS concept came about not because the dollar is unsuitable as a means of exchange or unit of account, but rather because of the use of the dollar by Washington as a weapon.”

Wade, who is also author of “Inflated: Money, Debt and the American Dream,” goes on to explain that “…the special role of the dollar in US finance allows the US government to impose harsh compliance and reporting requirements on foreign nationals and institutions.”

That been said Wade concludes that; “The global role of the dollar is an anomaly, the byproduct of two world wars had left the other antagonists broke by the time the Bretton Woods Agreement was signed in July 1944.”

“Choosing the paper dollar as the default global reserve currency reflected the fact that the United States possessed the wealth that gave Washington unchallenged economic leadership,” he goes on to explain.

“Prior to World War I, the United Kingdom’s pound sterling was the global standard, but importantly, this paper currency was backed by gold,” he detail.

It should be noted that the dollar, too, was backed by gold up until 1933, “…when the Franklin Roosevelt administration confiscated gold in private hands to prevent his government from collapsing,” Wade details.

He also explains that Britain and other nations left the gold standard in the 1930s, due to the deflation caused by the Great Depression rather than a deliberate choice.

Owing to various factors, Wade says today “…the dollar is losing its role as a store of value to gold.”

However, this change as well as de-dollarization in global trade is not going to happen over night.

“The fact that the dollar continues to trade strongly versus other currencies reflects the reality that as the main means of exchange globally, the dollar cannot be easily replaced,” the expert cautions.

He point blank asserts that; “What global currency will replace the fiat paper dollar? None.”

As this article is being written, Wade notes, gold is the second-largest reserve asset for central banks after the dollar.

What this means is that, while de-dollarization takea hold, it is not necessarily that another currency will replace the dollar but rather, countries are.moving back to gold as the store of value over the dollar.

BRICS, Africa favoring gold over dollar

According to the Business Insider Africa; “Gold reserves have long been a cornerstone of central bank financial strategies worldwide, and African nations are no exception.”

Nations like Tanzania have recently started their own national gold reserves requiring all miners to sell a percentage of their gold mined to the government.

“Amid ongoing global economic uncertainty, evolving monetary policies, and the need for more diversified reserve assets, many African central banks have been steadily increasing their gold reserves,” the Insider writes.

“The initiation in 2002 of the Shanghai Gold Exchange was of great strategic significance, both for gold and the global monetary system,” said gold fund manager Henry Smyth in an interview in The Institutional Risk Analyst.

Smyth sees the creation of the SGE in 2002 as the return of gold to the international monetary system.

“But while gold is growing in importance as a reserve asset for many countries, it does not mean that the role of the dollar as a global means of exchange or unit of account is about to change,” he explains.

However, that been said, he acknowledges that while; “The dollar will remain the dominant asset…displacing the dollar will require a major change in the international monetary system, a change that is already underway.”