(Kitco News) With the global dedollarization trend accelerating, the two assets that could benefit are gold and the crypto space, analysts say.
Earlier this summer, Russian President Vladimir Putin said Brazil, Russia, India, China and South Africa (BRICS) were developing a new basket-based reserve currency.
“The question of creating an international reserve currency based on a basket of currencies of our countries is being worked out,” Putin said at the BRICS business forum in late June. “We are ready to work openly with all partners of the show.”
The five countries are also trying to create an alternative mechanism for international payments, he added.
The BRICS could also see their membership increase, with Turkey, Egypt and Saudi Arabia considering joining the group.
This is not the first time something like this has been mentioned, with BRICS countries already starting to incorporate more local currencies for payments in mutual exchanges. Over the summer, India and Russia held talks to accept each other’s local payment systems RuPay and Mir, according to the Deccan Herald.
Analysts see this new proposed BRICS reserve currency as an alternative to the US dollar and the International Monetary Fund (IMF) Special Drawing Rights (SDR) currency.
“One can only think of this as a move to address the perceived US hegemony of the IMF and allow the BRICS to build their own sphere of influence and monetary unity within that sphere,” Chris said. Turner, global head of markets at ING.
Russia’s efforts to de-dollarize are far from new, but they were accelerated following Western sanctions imposed on Russia after its invasion of Ukraine in late February.
“The speed with which Western countries and their allies sanctioned Russian foreign exchange reserves (freezing about half) undoubtedly shocked the Russian authorities. The Central Bank of Russia has indeed admitted it and no doubt some BRICS countries – especially China – noticed the speed and stealth with which the US Treasury acted,” Turner pointed out. “So BRICS countries may feel they need an alternative reserve currency to match something like the IMF SDR.”
The IMF’s SDR is not a currency in itself. Instead, it is a basket of claims on major reserve currencies such as the dollar, euro, pound, yen and renminbi, Turner explained.
Security, liquidity and yield make for an excellent reserve currency, which is why the BRICS could potentially turn to gold, he added. “We doubt that the mercantilist nations involved in the BRICS want to transfer valuable foreign exchange reserves into this more local sphere of influence. Russia, prefer to go gold,” Turner said.
Another asset that could benefit from a larger de-dollarization move is Bitcoin, said John LaForge, head of real assets strategy at Wells Fargo.
“If it works and you look 20 years from now, you’d have a western dollar-euro influence. And on the other side, you’d have the Chinese yuan and the Russian ruble, or whatever that combination was. And then you’d have have the third option called Bitcoin, which is the middle one that is not based on countries but on individuals saying they don’t want to vote with a particular block, preferring a global currency that is not controlled by anyone”, he told Kitco News. “These two battling blocks could open up opportunities for something else. [like Bitcoin] to appear later.”
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Impact on the dollar
Meanwhile, the greenback surged, with the US dollar index trading near 20-year highs ahead of the much-anticipated Jackson Hole symposium.
Over the summer, the dollar has become the popular safe haven as other economies grapple with more problematic inflation and growth issues. And the U.S. dollar could retain its strength over the next six months, according to LaForge.
“Our base case is that the United States will enter a recession somewhere in October or November, which will last until the middle of next year. Typically, the dollar loses strength when signals indicate that states United States is coming out of recession. So if our base case is correct, you could see the dollar start to weaken in the first quarter of next year in anticipation of that.”
Until then, the dollar will continue to act as this defensive asset.
Moreover, the BRICS proposal to create their own reserve currency should have a limited impact on the US dollar in the short term. However, if the dedollarization trend continues to accelerate, it would leave a mark on the greenback, LaForge said.
“If you look at the dollar foreign exchange reserves held by central banks around the world, it’s going down a bit. They’re starting to claw back more alternative currencies. It’s been 15 years – the slow wind blowing away from the dollars,” “The longer-term impact is not a major thing. But this combination of [big players like] The coming together of China and Russia to form their new currency bloc is real.”
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