A plan by the Brics group of emerging-market nations to look at a joint currency has got investment banks examining whether that’s any threat to the global dominance of the dollar.
The latest to weigh in is ING Groep NV, whose strategists see the greenback remaining the choice for debt issuance and trading. While the dollar’s demise has been mooted many times in recent years, so far other pretenders have been competing amongst themselves and there’s no conclusive evidence for a structural dollar decline, they say.
Brics countries will discuss deepening the use of local currencies at a summit in South Africa next week, including the establishment of a common payments system and initial exploration of a joint currency on a technical level. That’s part of an ongoing backlash against the hegemony of the US dollar.
While some potential dollar rivals such as the Chinese yuan have already made inroads, that has often happened at the expense of currencies other than the dollar, according to the report by ING analysts including Chris Turner, its global head of markets.
“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,” the ING strategists wrote in the report Thursday.
The Brics group isn’t calling for de-dollarisation, acknowledging that the US currency will continue to be a major global currency, the South African ambassador to the bloc said. The group comprises Brazil, Russia, India, China and South Africa.
The group’s efforts to make its New Development Bank a leading international lender in its field also faces headwinds, according to Morgan Stanley.
“The bank has continued to primarily lend in USD and does not expect the adoption of a common currency in the near-term,” Morgan Stanley strategists Emma Cerda and Simon Waever wrote in a report Wednesday.
Others have been more upbeat. BNP Paribas SA said in a note in June that conditions were ripe for the dollar’s dominance in global trade to diminish, even if the process was “a slow, incremental burn.”
“As the global geopolitical landscape continues to shift, the future of the USD remaining as the trade settlement currency of choice for a number of countries is being questioned,” BNP said in the June report.
ING also pointed to the dollar’s longer-term challenges from both economics and geopolitics. Its report on the prospects for de-dollarisation found:
- In terms of central bank FX reserves, there has been a drop in the dollar’s share, but dollar usage has held up very well in commerce, private assets, debt issuance, and generally on the global FX market.
- During an era of zero rates, the dollar was getting pushed out by currencies including the Chinese yuan from central bank reserves, but that may change given normalization of monetary policy in the US.
- For debt issuance, the dollar very much retains its crown as the preferred currency – in fact it has become even more popular for EM issuers over recent years. The euro remains a distant challenger and only dominant within Europe.
- Central European countries, which had made efforts to move toward local currency or euro issuance, have actually ramped up their dollar debt sales again.
- In trade, the dollar remains preferred and the Brics haven’t gained market share in this field yet.
- In over-the-counter FX transactions, Asian currencies are gaining ground, but don’t seem to be pushing out the dollar. They are rather competing for the market shares of other currencies, including the euro, Australian dollar and yen.
- Russia’s geopolitical aversion to the dollar gave the yuan an additional boost, but China’s capital controls and low issuance of panda bonds remain an obstacle.
© 2023 Bloomberg
