The prospect of a new world currency has been gaining traction, with the BRICS alliance exploring the idea of an innovative currency. The group of nations plans to share proposals at a forthcoming summit in South Africa, which has led to discussions on the potential impact on the U.S. dollar as the dominant global currency.
However, despite the buzz, there are a few reasons that would suggest the dollar is not giving up its position anytime soon.
The world's confidence in the U.S. and its currency is one significant factor that bolsters the position of the USD. The American financial markets are some of the world's deepest and most liquid, thanks to the size and strength of the U.S. economy, open trade and capital flows, and a strong rule of law.
Read also: Hold Onto Your Wallets — A New World Currency Could Be In The Making, Courtesy Of BRICS Nations
This confidence has led to about 60% of global foreign currency reserves being held in USD, far ahead of other currencies such as the euro, yen, and Chinese renminbi.
Another key element supporting the U.S. dollar's dominance is the network effect it has in trade invoicing and international finance. The USD is the most popular medium of exchange for trade, with more than 70% of exports outside of Europe being invoiced in the currency.
The Dollar’s popularity as a medium of exchange has solidified its position as the dominant currency in international banking.
More than that, the U.S. has maintained massive trade deficits, which has led to an abundance of U.S. treasury securities and banknotes held by the rest of the world. While countries could potentially decide to trade in their own currencies instead of the USD, there are several issues that hinder this transition.
For instance, countries like China and Saudi Arabia would need to deal with the limitations of their own currencies and lack of viable investment options, as well as capital controls.
A shift away from the current economic model that relies heavily on exports to drive economies would be challenging for countries like China, Germany, Taiwan, and South Korea. Transitioning to a consumption-led model would require a significant redistribution of national income and would be a massive political undertaking.
The ongoing discussions within the BRICS alliance, comprising Brazil, Russia, India, China, and South Africa, regarding the establishment of a unified currency backed by assets such as gold and rare-earth elements, may seem like a potential threat to the USD.
However, the reality is that there is no practical alternative to the U.S. dollar at this time, and its dominance in the global financial landscape is likely to continue for the foreseeable future.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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