Underlying weakness in the US$, amid United States President Trump’s trade tariff mayhem and U.S. efforts to de-escalate global trade, could ignite speculation over the role of the U.S. dollar as the fiat currency underpinning global commodities.
In light of underlying volatility, foreign governments are also seeking to recalibrate the international financial system as they reduce their exposure to U.S. bonds.
As it currently stands, the international financial system remains dominated by the U.S. dollar, which accounts for about 90% of all currency trading.
Reliance on US dollar waning
However, while virtually all oil trading is traditionally conducted in U.S. dollars, recent signs suggest this is rapidly changing.
For example, in 2023 around a fifth of oil trades were reportedly made using non-US dollar currencies.
Recent attempts by the Trump administration to dial down its global predominance over financial markets could heighten attempts by the BRICS nations to capitalise on it.
Extending well beyond its five initial member states - Brazil, Russia, India, China and South Africa – the ever-expanding BRICS trading bloc recently entered into discussions to establish a new reserve currency backed by a basket of their respective currencies.
Could ‘the unit’ replace the US$?
It’s understood that the 2024 BRICS Summit in Kazan, Russia last October discussed the potential for creating a gold-backed currency, known as the "Unit," as an alternative to the U.S. dollar.
At the time, Russian President Vladimir Putin confirmed that BRICS is building an independent payment system - potentially backed by gold – that would allow member states to efficiently conduct foreign trade without relying on the U.S. dollar or the euro.
Rather than establishing a common currency right away, BRICS is developing a blockchain-based platform called the BRICS Bridge Multi-sided Payment Platform (BMPP).
This innovative system is expected to connect member nations’ financial networks, enabling settlement via central bank digital currencies (CBDCs).
End game
However, the BMPP is seen as a prelude to a BRICS-wide currency, “The Unit” which would be pegged 40% to gold and 60% to a basket of BRICS members' national currencies.
The end game is to create a stable and universal instrument for trade, which can be converted into any national currency, helping to further decouple from the U.S. dollar.
The full rollout of this currency could take until 2030 for full implementation.
Meantime, BRICS members are expected to continue reducing their U.S. dollar holdings, especially China, which has been the most active in diversifying its reserves.
De-dollarisation
Meanwhile, the potential disruption to the U.S. dollar as the world’s dominant reserve currency has not gone unnoticed.
Late last year the tech-heavy US exchange, the Nasdaq, warned that a BRICS currency could lead to significant "de-dollarisation" globally.
Such a shift is expected to have far-reaching consequences, not just for the U.S. but for the global economy.
The Nasdaq also flagged increased investor appetite for opportunities in currencies beyond the U.S. dollar.
Recent developments in global financial markets triggered by the U.S. administration's initiatives clearly could present lucrative opportunities for those prepared to navigate the [financial and trading] changing landscape.
Shane Oliver chief economist with AMP concedes that an alternative currency to replace the U.S. dollar could potentially happen.
However, unless such a development is hastened by crazy policies – by the U.S. President - that further destroy confidence in the U.S. dollar, he suspects this will only unfold over many years as the relative size of the U.S. economy declines.
