How Brics can push de-dollarisation and avert a global dollar disaster

Amid rising dollar risks, Brics states should integrate their currency and bond markets, and tax dollar transactions to promote local currency use
An effective de-dollarisation would rein in America’s free-spending ways and could save the world from the catastrophe of a dollar collapse

Andy Xie

Published: 5:30am, 22 Sep 2023

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As the de-dollarisation movement grows, Brics-plus countries can help it along by working to integrate their currency and fixed-income markets. Such integration would lead to better liquidity and a more efficient price discovery process. Easier access to local bond markets would also offer a more convenient way to store trade surpluses.

To aid the process, the Brics-plus states – Brazil, Russia, India, China, South Africa and six others set to become full members – should impose a Tobin tax on foreign exchange conversions that involve any currency of nations in the Global North. Such a tax, proposed by Nobel-Prize-winning economist James Tobin in the 1970s, is meant to discourage short-term currency speculation.

The US dollar dominates the global economy. It accounts for 90 per cent of currency market transactions, 59 per cent of foreign exchange reserves and half of global trade. A dominant currency is the natural outcome of market efficiency. If the 11 Brics-plus countries settled trade entirely in their local currencies, it would require 55 pair trades. If they settled in dollars, it would require just 10.

The efficiency of a dominant currency results in much better liquidity in its currency market, reinforcing its advantage. And the dollar has the added advantage of a deep bond market, where trade surpluses can be easily parked. For the global economy, dollar dominance is an efficient outcome.

But de-dollarisation has become a thing, for two reasons. First, the United States has resorted to financial sanctions to weaken and defeat its perceived enemies. Its measures include kicking countries off the Swift financial messaging system and freezing their foreign exchange assets. And then there are the secondary sanctions on countries that do business with US sanction targets.

The weaponisation of dollar supremacy has put most Global South countries in jeopardy. For them, the US is no longer the dominant source of trade and investment, and being beholden to America’s geopolitical interests harms their economic interests.

Second, the US has been on a debt binge since 2008, a profligacy made possible by the dollar’s supremacy. The US is spending big, come rain or shine. Massive deficit spending has become a default fiscal policy. The logical end to this madness is the collapse of the dollar and rampant inflation. Countries with trade surpluses may be lured by the convenience of parking their wealth in the dollar but it could all go ka-boom one day. This is a powerful incentive to find alternatives.

Brics nations have been talking about de-dollarisation options, including settling bilateral trade in local currencies and creating a new currency for value storage or even trade settlement. Trade among the Brics bloc is increasingly settled in local currencies, which makes sense, and is partly due to the US Swift ban on Russia. In a way, using their own currencies has become a necessity.

A single currency is not the best way for Brics to de-dollarise

But a new currency is not likely to work. Such a creature would have to be a basket of Brics currencies, similar to the International Monetary Fund’s special drawing rights. It would struggle for trading liquidity and its use would depend on going to Brics-plus central banks to swap back into fiat currencies. Inconvenience would doom it. An independent currency would also have no economic foundation and could end up like bitcoin, with a wide trading range – impractical for trade settlement or value storage.

Instead, Brics-plus states should improve the liquidity in local currency trading. There are three good options. First, they should integrate their currency markets by creating a common settlement mechanism. It could be an overlay on domestic mechanisms, that is, when a better bid or offer is available from another market, the trade can be settled between markets. Improved liquidity and trading convenience would encourage the use of local currencies.

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Second, Brics-plus nations should integrate their bond markets, also through a common settlement mechanism. This would encourage the parking of trade surpluses within the bloc itself, lower pressure on interest rates and boost investment. It wouldn’t be hard to create a system to seamlessly integrate their currency and bond markets.

Also, integration could be extended to the retail level. Travellers within the bloc could settle their purchases in their local currencies through digital payment platforms. With the technology, people or businesses wouldn’t have to think about what currencies they are using. The convenience would decrease the need for the dollar.

Third, to overcome the dollar’s vast incumbent advantage, Brics-plus states should impose a small Tobin tax on currency trades involving the dollar, or even other Global North currencies. Global South currencies face a liquidity disadvantage – giving Global North currencies a small headwind would level the playing field somewhat.

True lesson of US dollar privilege won’t be lost on Brics+

Speculation is a bit part in the dollar’s hyper liquidity and not good for financial stability anyway. Emerging market crises have been driven by sentiment swings in the dollar market. There is a legitimate case for slowing it down to begin with.

De-dollarisation can be successful only if driven by markets and technology. Conjuring up some new, complicated and detached currency would not succeed. Its failure would reinforce the dollar’s dominance, which would be dangerous.

The US is going down a seemingly never-ending path of spending borrowed money. This is not good for America or the world. De-dollarisation must be effective enough to reign in the free spenders in Washington. It could save the world from a catastrophe.

Andy Xie is an independent economist