Is the US dollar still king?

Dear Editor,
The global financial landscape has long been shaped by the supremacy of the U.S. dollar. Yet, in the wake of Western sanctions against Russia and economic uncertainty in the U.S., emerging markets are increasingly motivated to reduce their reliance on the dollar, and explore avenues for financial independence. This plan, led by the so-called BRICS countries: Brazil, Russia, India, China, and South Africa, is well-intentioned but is not the right answer.
BRICS countries increasingly clamour to challenge the dollar’s dominant role as the world’s reserve currency. The reserve currency is held in great quantities by Central Banks, and is used by financial institutions for international trade. Until World War II, the British pound served as the reserve currency. Since then, the U.S. dollar has.
Russian leader Vladimir Putin said last June that the BRICS countries are developing a new reserve currency for member countries. Brazil’s President Luiz Inácio Lula da Silva also expressed support for a common currency. China, too, is in favour of challenging what its Ministry of Foreign Affairs calls U.S. “dollar hegemony.”
Members of the group have announced their intention to discuss the matter at a late-August summit in Johannesburg. Russia has already ramped up its use of the Chinese yuan to cope with the Western sanctions imposed on it.
After Russia invaded Ukraine in February 2022, the G-7 Group of Nations retaliated with onerous economic punishments on Russia. That forced Moscow to seek alternatives to the dollar and euro. Some BRICs backers have floated ideas such as expanding the use of the Chinese yuan in transaction settlements, but few have yet embraced as far-reaching a proposal as a common BRICS reserve currency.
That wouldn’t be easy to implement. The dollar’s dominance in the global market cannot be overstated. The dollar is the preferred currency of governments, accounting for about 60 percent of Central Bank reserves in late 2022, compared with the euro’s 20 percent and the Japanese yen’s 6 percent. The U.S. dollar is used in 84.3 percent of cross-border trade, compared to the yuan’s 4.5 percent. The pound, the Chinese yuan, and the Canadian and Australian dollars represent less than 5 percent of government reserves. The dollar is also dominant, although less so, in private markets.
The BRICS countries cannot compete with the dollar’s financial dominance and stability. One reason: BRICS nations often don’t get along. Political tensions between India and China make it nearly impossible for India to turn its back on the U.S. and side with China on currency or any other matter.
BRICS economies are also not especially stable. China is an economic superpower. India has a large but still-developing economy. The other three are essentially stagnant commodity exporters. The economies also are dramatically different in terms of trade, growth and financial openness.
Real Gross Domestic Product per capita between 2008 and 2021 rose 138 percent for China, 85 percent for India, 13 percent for Russia, and 4 percent for Brazil. South Africa had a 5 percent contraction. Trade between the members is severely imbalanced, with India and South Africa both running long-term deficits with the other members.
All BRICS members run account surpluses; meaning, they rely on other economies’ demand, and must export their excesses abroad. If the countries want to reduce their reliance on the dollar and on the West, their options for exports would be limited. China would have to absorb the demand, yet it has shown no intention of doing so. In fact, the country’s account surplus hit a 14-year high this year.
Deciding about reserve currencies can be complicated. The Government of Guyana, for example, might feel that it needs to show fealty to its big neighbour to the south, Brazil. But the BRICS effort is unlikely to produce results that are in the long-term interest of our country. Guyana’s big neighbour to the north, the U.S., remains the safest storehouse of financial investment.
In today’s interconnected global economy, the U.S. dollar is a pillar of strength. As the world’s premier reserve currency, it plays a crucial role in facilitating international trade and shaping the financial landscape across nations. The challenges facing BRICS countries make clear that the U.S. dollar is likely to keep its role as the world’s reserve currency for a long time to come.

Yours truly,
Nazar Mohamed
Businessman