Brazil, Russia, India, China and South Africa (BRICS) alliance members meet in Johannesburg, South Africa, in August 2023, for what may be one of the most important BRICS summits yet. Top of the agenda is the introduction of a new BRICS currency. The currency has been under discussion for several years, but it has recently gained traction. If successful, it has the potential to disrupt global financial markets.
The impact of the BRICS currency on the forex market would require careful investor consideration. Some may diversify their portfolios to reduce exposure to the U.S. dollar.
What is BRICS Currency?
The BRICS currency is a proposed common currency. It is backed by gold and supported by the BRICS alliance, Brazil, Russia, India, China and South Africa. The new currency introduction aims to challenge the dominant position of the U.S. dollar as the global reserve currency.
The proposed currency is not restricted to BRICS members. At least 20 countries, including Saudi Arabia, Egypt, United Arab Emirates, Turkey and Algeria, have shown interest in using the BRICS currency.
Existing member currencies will form the basis of the BRICS currency valuation. The successful launch of such a currency should result in economic cooperation among member states.
Background on BRICS Currency Initiative
BRICS was founded in 2006. The term BRIC was initially coined by economist Jim O'Neill in a 2001 report published by Goldman Sachs. It referred to the emerging economies of Brazil, Russia, India and China. South Africa joined the group in 2010. The main objective of BRICS is to promote economic cooperation, political dialogue and mutual development among its member nations.
BRICS founded the New Development Bank in July 2014 to rally funds for sustainable development projects in emerging economies. The bank guides the member nations to develop a cross-border shared currency.
The BRICS members have discussed their interest in a shared currency. Growing dollar strength has also driven a desire among emerging economies to reduce their dollar dependence and shield their economies from the Federal Reserve’s interest rate decisions. Emerging market economies are vulnerable to exchange rate fluctuations. As interest rates in the U.S. rise, other currencies decline in value, increasing the cost of debt in the Global South.
BRICS' interest in a shared currency gained momentum with the Russian invasion of Ukraine. Financial and economic sanctions imposed on the aggressor and the U.S. trade war with China highlighted the dominance of the U.S. dollar. It demonstrated the power of the U.S. to cut off global trade.
BRICS nations want a common currency to protect themselves and other member countries from sanctions. They want more global sway and see a common currency as a means to reduce U.S. economic control.
Luiz Inácio Lula da Silva, a firm supporter of the BRICS currency, regained power as Brazillian president in the 2022 elections. He is re-igniting the decade-long BRICS interest in a shared trade currency.
Comparison With Other Global Reserve Currencies
The U.S. dollar dominates financial markets and international trade. Over 88% of global trade is funded with U.S. dollars, which account for 58% of the world’s foreign exchange reserves. The purpose of a reserve currency is to provide an exchange medium to ensure cross-border financial transactions, payments and investments.
The euro accounts for 30.5% of all transactions, the Japanese yen 16.7% and the British pound 12.9% — because there are two transactions in every trade, total transactions measure 200%. Oil transactions are in U.S. dollars, which is how the U.S. currency achieved dominance as the world’s reserve currency.
The BRICS partnership includes 41.4% of the world population. Member states produce 25% of the global Gross Domestic Product. With another 13 countries formally requesting admission and seven expressing interest, the BRICS currency may become a force to reckon with.
Potential Benefits for Forex Traders
If the BRICS nations successfully launch a currency, they will claim economic independence and start to compete in international financial markets. The introduction of another major currency will have a significant impact on the value of the dollar. It is likely to reduce global dollar demand.
The new currency would reduce U.S. influence, and the dependence on the U.S. dollar as a global reserve would decline. Global financial volatility would drop as the rest of the world becomes less dependent on the dollar and more disconnected from U.S. political and financial moves.
A successful BRICS currency could encourage other nations to de-dollarize, using their currencies in cross-border trades. This move would further reduce the demand for dollars. Reduced dollar demand has the potential to heavily impact the U.S. economy.
The BRICS currency will facilitate trade between members, reducing transaction costs and currency conversion fees. Adding a major currency would enhance market depth and liquidity in the forex market. It would provide traders with more currency pairs. It would increase trading opportunities and reduce volatility.
Challenges and Risks Associated with BRICS Currency
The integration of currencies in the BRICS bloc will not be easy because the countries supporting this common currency have very different economic backgrounds. Their interest, monetary and inflation management strategies also differ substantially.
On the upside, BRICS countries are situated across the globe, producing a diverse range of goods and services, so they could service a large portion of their requirements within the trade bloc. BRICS has used inter-state payment mechanisms since 2010 through the BRICS Interbank Cooperation Mechanism. They have also found ways to bypass the U.S. dollar in cross-border transactions.
Before launching a currency, BRICS members must agree on an exchange rate method. They would have to set up regulations and a stable financial market and deal with issues of international trade and economic stability. Currency success would depend on widespread acceptance and trust in financial controls.
Impact on Forex Market and Trading Strategies
If the BRICS currency gains traction, it will reduce global reliance on the U.S. dollar. This shift would lead to a decrease in dollar demand, potentially impacting its value and weakening its influence in international markets.
The introduction of a BRICS currency could impact exchange rate dynamics among the member countries and with other major currencies. Traders must closely monitor and analyze these relationships and adapt their trading strategies to capitalize on potential opportunities.
Investors may protect their investments by diversifying portfolios and investing in financial assets like commodities, shares and bonds to reduce dollar exposure.
The successful launch and adoption of a BRICS currency would require coordination among the member nations. Forex traders would have to stay updated on developments and monitor market dynamics. They would have to adapt their strategies to capitalize on opportunities and navigate the risks associated with a new major currency in the forex market.
A Successful BRICS Currency Could Reshape the Financial Landscape
A BRICS currency could reshape the global financial landscape and challenge the dominance of the U.S. dollar. The BRICS nations have a strong desire to reduce their dependence on the dollar and protect themselves from sanctions. BRICS currency success depends on whether member nations can navigate complex economic and trade dynamics. As the world watches the development of the BRICS currency, its impact on the forex market and trading strategies will need careful analysis and adaptation.
Frequently Asked Questions
Is BRICS launching a new currency?
BRICS is currently discussing the possibility of launching a new currency, but they still face challenges. Some BRICS nations, like India, plan to maintain their current internal currencies.
Where to buy BRICS currency?
There is currently no BRICS currency available to buy on the financial markets.
How much is the BRICS coin worth?
No BRICS coins have been minted. If the BRICS currency materializes, it will likely be based on a basket of currencies that make up the member states.
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About Anna Yen
Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.