Brics summit: Why the US dollar will remain dominant despite bloc's push to de-throne it

Some members of the bloc comprising Brazil, Russia, India, China and South Africa are pushing for expansion and a competing currency at annual summit in Johannesburg

Brazilian President Lula da Silva arrives in South Africa to attend 15th Brics summit. EPA

Talk of de-dollarisation has gathered pace, as members of the Brics economic group meet this week in South Africa for a summit, but the US currency is unlikely to lose its crown as the world's international reserve currency.

Members Brazil, Russia, India, China and South Africa are pushing to expand the bloc's membership at the August 22-24 annual leaders’ summit in Johannesburg.

At least 23 countries are said to have expressed an interest in joining the group.

Any new additions to Brics will be the first expansion since South Africa, the second largest economy in Africa, joined the group in 2010. Among the potential candidates are economic powerhouses including Indonesia and Saudi Arabia.

Also on the agenda of the 15th annual summit are talks on greater use of local currencies to settle trade between the countries.

Leaders and financial policymakers of the member states are also scheduled to discuss prospects of a Brics currency, aimed at challenging the dominance of the US dollar and dethroning it as the international reserve currency.

The summit will push to adopt policies that can help Brics increase its political clout in line with its growing economic and financial influence in the world.

“We want to make the Brics very strong politically, very strong financially,” Brazilian President Lula da Silva was reported by Bloomberg as saying.

Growing friction between the US and China, the world's two largest economies, and a divergence of country positions on Russia’s war in Ukraine may provide an impetus for the Brics leadership to push harder to become more influential, economically as well as politically in the global arena.

Despite attempts to rally support against the US dollar, analysts believe the bloc is unlikely to materially dent the dominance of the greenback.

“Overall, whilst any 'Brics+' grouping could bring into question the speed and scale with which member countries adopt commercial and financial systems outside of the US dollars domain, we hold conviction in our previous examination that being fed up with the US dollars dominance is old hat, and it will remain the world’s currency of first resort, in our view,” said Ehsan Khoman, head of commodities, ESG and emerging markets research at MUFG bank.

A combination of the financial sanctions leverage, which the US applies to “shut adversaries’ economies out of the US dollar payments system”, China’s growing status as a competitor to Washington's international supremacy, and the splintering of geopolitical blocs, has prompted much discussion on “the weaponisation of the US dollar”, according to the lender.

The core part of the debate remains whether other currencies can mount a challenge to the still mighty dollar.

China has so far led efforts in that direction and the importance of its currency as a medium of global trade settlements has grown significantly over the past years.

However, neither the yuan, nor for that matter any other currency, has made major inroads into the greenback’s pre-eminent status.

The Standard Chartered Renminbi Globalisation Index (RGI), the UK bank’s proprietary measure of international yuan usage, rose 26.6 per cent in 2022, topping the 18.5 per cent growth recorded in 2021, Standard Chartered said in a report earlier this year.

Last year, 42.1 trillion yuan ($6.1 trillion) worth of China’s cross-border payments and receipts were settled in the country's currency, up 15 per cent from the previous year, marking the fifth straight annual increase, according to data from the Chinese central bank.

The share of yuan settlements, of the total value of goods traded and foreign direct investment, reached 18 per cent and 70 per cent, respectively, with both measures hitting new highs in recent years, according to the report.

At the end of March, China and Brazil reached a deal to trade in their own currencies, ditching the US dollar as an intermediary, the Brazilian government said.

China has similar deals with Russia, Pakistan and several other countries.

“Within Brics, China’s amplification of renminbi swap lines has helped promote the use of its currency in trade and FX reserves, but it’s capital controls and low issuance remain hurdles,” Mr Khoman of MUFG said.

There are several challenges in terms of attaining the top status of the global transaction currency, which include depth of the capital market, trade invoicing and convertible currency management systems.

“King dollar sits serenely on its throne and unrivalled when considering these interlinked factors,” the Japanese lender said in a report in May.

The dollar, which hit 2023 highs in March, is bouncing back from the lows seen in July, and analysts expect the rally to continue deeper into this year.

“The real yields are on the rise again, there is little reason to keep the US dollar on a bearish trend for the months ahead,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said in a research note on Tuesday.

“The dollar rally, which started by mid-July should further develop, and there is significant room for further correction before we could technically call the end of the dollar’s bearish trend.”