BRICS Currency, Dollar, or Yuan – Which Will Prevail?
As the global monetary system undergoes a period of transformation, there is a growing recognition within the global financial community of its advantages and disadvantages.
While the limitations of the dollar-centric system are increasingly acknowledged, concerns arise regarding excessive fragmentation if more national currencies are used in international transactions.
Scenarios for Transforming the International Monetary System
To avoid the extremes of over-centralization and excessive fragmentation, is there a middle ground that can establish a diverse yet stable and reliable international monetary system?
One approach to envisioning the potential paths for transforming the international monetary system is by examining its de-monopolization away from the dominance of the US dollar. Several scenarios seem to be emerging:
- Continued dollar monopoly: The dollar remains at the center, with limited success by the yuan in challenging its hegemony.
- Dollar-yuan duopoly: The yuan gains ground, primarily in the Global South, leading to a significant shift away from the dollar.
- A fragmented system of national currencies (competitive scenario): The weakening of the dollar monopoly results in excessive fragmentation, with various national currencies in widespread use.
- Regional currencies (oligopoly): Regional currencies, including a BRICS reserve currency, complement the dollar and yuan as potential reserve currencies.
It’s important to note that each of these scenarios deviating from the current dollar dominance has its limitations. The emergence of new regional currencies will likely take time and may not be a short-term option.
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Challenges and Limitations of Deviating from Dollar Dominance
A fragmented world with multiple reserve currencies is unlikely to be sustainable, as currencies with smaller shares of the global economy are unlikely to attain reserve status. Excessive fragmentation can lead to higher transaction costs and a more uncertain and burdensome business environment. The scenario of “yuan ascendancy” also has issues, as it may result in a shift from dollar dependency to greater reliance on the yuan without providing enough options for emerging markets.
The transformation of the global monetary system will depend on the economic balance of power in the world economy.
Despite these challenges, as the dollar’s “exorbitant privilege” weakens, its share in global international reserves is expected to decline, reflecting new political and economic realities. In the long run, the market structure of global reserve currencies will likely be determined by countries’ economic fundamentals, such as their share in global GDP, exports/imports, and investment flows.
Countries may choose to hold a particular currency in reserves if it represents a significant portion of their trade and investment transactions, indicating that economic weight and size matter in the reserve currency market.
Peaceful Coexistence of Western and Global South Reserve Currencies
If the share of national currencies in global reserves aligns with the respective countries’ shares in global GDP or trade, a plausible outcome is a reduction in the US dollar’s reserve share from nearly 60% to around 25-30% (or even less if the US share in global GDP declines), while the Chinese yuan’s share may rise from less than 3% to over 10%.
READ MORE: BRICS Currency, Dollar, or Yuan – Which Will Prevail?
The remaining 20-25% of de-dollarization in global reserves may benefit the euro and other reserve currencies of the developed world to a lesser extent. Gold and the IMF’s SDRs could also see increased prominence.
Additionally, regional and trans-regional currencies from the Global South may find a place as leading reserve assets if the economic weight of member countries backing such currencies is substantial. This could lead to the rise of regional currencies as primary reserve holdings for central banks worldwide.
Overall, the decomposition of reserve currency shares in the global economy suggests an “oligopolistic” scenario, characterized by peaceful coexistence among Western reserve currencies like the dollar and euro, alongside new reserve currencies originating from the Global South.
These new currencies, including the yuan and regional currencies that overcome fragmentation effects, may play a crucial role in driving global reserve de-dollarization. This scenario is likely to achieve the highest degree of de-dollarization compared to other scenarios.
The latter apart from China’s yuan may include regional currencies that overcome the fragmentation effects of the growing use of national currencies in international transactions. The role of currency baskets such as the BRICS currency basket – widely referred to as R5/R5+ (all BRICS currencies start with a letter “R”) – may prove to be crucial in catalyzing the process of global reserve de-dollarization.
BRICS’s role in de-dollarization
Such a scenario associated with the emergence of new currency reserve alternatives from the developing world is also likely to attain the highest degree of de-dollarization compared to other scenarios referred to earlier.
Most likely a high degree of fragmentation in the use of national currencies in international transactions will leave the position of the dollar largely uncontested. There may be somewhat more headway achieved by the yuan, though a potential duopoly would leave the position of the yuan subject to pressure from the US and the West more broadly.
The yuan by itself is unlikely to alter the monetary system in a qualitative way – it needs other countries and currency unions to “break the ice”.
It appears then, that a breakthrough in de-dollarization can only come from a combination of regional currencies or a platform that brings together the largest emerging markets, such as the BRICS-plus R5+ platform
Alexander Stefanov
Reporter at CoinsPress
Alex is an experienced finance journalist and a cryptocurrency and blockchain enthusiast. With over five years of experience covering the industry, he deeply understands the complex and constantly evolving world of digital assets. His insightful and thought-provoking articles provide readers with a clear picture of the latest developments and trends in the market. His passionate approach allows him to break down complex ideas into accessible and insightful content. Follow up on his content to be up to date with the most important trends and topics - stay ahead of the curve with CoinsPress.
