A leading commodities expert has poured cold water on the ambitions of BRICS nations to supplant the US dollar as the global reserve currency, dismissing the notion of “de-dollarization” as a myth.
What Happened: Jeffrey Christian, founder of CPM Group, a commodities research firm, has outlined a series of formidable challenges facing countries seeking to break free from the dollar’s dominance in a newsletter.
Central to Christian’s argument is the unparalleled liquidity of the US dollar.
He points out that the greenback is involved in 88% of daily currency transactions worldwide, according to the Bank of International Settlements.
Furthermore, the dollar accounts for nearly 60% of all foreign exchange reserves globally, as per IMF data.
"Other currencies, like China’s yuan, are bound by strict capital controls, making them less liquid and less attractive," Christian added, underscoring the limitations of these alternatives when compared to the dollar.
The second critical issue Christian identified is the U.S. dollar’s dominance as the world's most widely used currency.
He pointed out that countries choosing not to use the dollar could see their imports and exports hindered, significantly limiting their economic growth and range of trading partners.
He cited Russia as an example, where the economic landscape is becoming increasingly complex.
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Why It Matters: Recently, President Vladimir Putin signed a law legalizing cryptocurrency mining in Russia.
The law introduces various concepts related to digital currency mining, including regulations that allow only registered Russian entities to mine cryptocurrencies.
Despite this move towards embracing digital currencies, Russia still faces challenges as it continues to grapple with limited access to vital energy trades and a steady flow of U.S. dollars, which Christian warns could lead to a severe recession within a year.
China, another major global player, also faces difficulties in its financial transactions with Russia.
Payments between the two nations can take up to six months to process, with many bank transfers being returned, further illustrating the challenges of moving away from the dollar.
The third major hurdle is the inherent strength of the U.S. dollar itself.
The U.S. dollar index shows that the dollar has gained around 40% since its trough in 2011, while other currencies, such as the yuan, have depreciated against the dollar over the past decade.
“The dollar has been very strong for the last 20 years. And so, you are making bad investments,” Christian said of central banks opting to shed their dollar reserves.
Amid ongoing debates about de-dollarization, Christian advises investors to remain calm. He argues that it would take decades for the dollar to be displaced if that were ever to happen.
“You have these massive impediments to moving toward a less dollar-dependent international currency regime,” he said. “It's not impossible, but it’s either going to take decades to execute or it’s going to come at the end of a very enormous global economic and financial collapse that I just don’t see happening.”
The ongoing debate is likely to be a key topic of interest at Benzinga’s Future of Digital Assets event on Nov. 19, where industry leaders and experts will delve deeper into the evolving dynamics of global currencies, the role of digital assets, and their impact on the financial markets.
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