ING released a report looking at how a potential expansion of the BRICS grouping of major economies (Brazil, Russia India, China, South Africa) could determine the speed with which the block adopts commercial and financial systems outside of the dollar sphere.
The BRICS grouping is holding its fifteenth summit later this month. Up for discussion: an expansion of the bloc, greater use of local currencies and the possibility of a BRICS currency, which may have the potential to challenge the dominance of the US dollar.
Overall, the team does not see any conclusive evidence that the dollar is on the path of structural decline at this point. However, it is still facing challenges stemming from both economics and geopolitics.
The key toplines from the report include:
- There has been a drop in the dollar’s share of central banks FX reserves, but dollar usage has held up very well in commerce, private assets, debt issuance, and generally on the global FX market.
- Among the potential dollar challengers, euro may seem a runner-up, but its dominance is seen only in Europe. Looking at BRICS, China’s amplification of renminbi swap lines seems to have helped promote the use of its currency in trade and international reserves, and Russia’s geopolitical aversion to dollar gave CNY an additional boost, but China’s capital controls and low issuance of panda bonds remain an obstacle.
- A greater role of BRICS and other emerging markets in global trade may create more natural demand for alternatives to USD, but this has not happened so far. The higher share of CNY in trade invoicing doesn’t seem to be dethroning USD, but rather pushing out second tier developed market FX, such as GBP.
- The rising usage of alternative currencies does not seem to be threatening the dollar but rather increasing the competition among the regional currencies amid fragmentation of the trade and capital flows.
- No currency has made any inroad to the dollar’s pre-eminent status as the issuance currency of choice. Having been a major factor in removing sterling’s crown last century, challenging the dollar’s status in the international debt market has to be a central strategy for the young pretenders.