Should the US be worried about a new reserve currency?

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It has long been reported by The Epoch Times that China, and more recently due to the ongoing war, Russia, wished to see the US dollar knocked off its perch as the largest global reserve currency.

Russia and China have now started working on it, which is no surprise. But what is surprising is the announcement that several emerging market nations are working together with Russia and China. Russia Today (RT), an English-language Russian state media, Russian President Vladimir Putin reported in June that BRIC nations including Russia, China, India, Brazil and South Africa are working on creating a new currency of global reserve.

“According to the Russian president, member states are also developing reliable alternative mechanisms for international payments,” RT said.

This news was somewhat lost in the mix last month as the US economy was hit by rising inflation, a potential economic downturn, stock market volatility, cryptocurrency market turmoil, business layoffs. technology sector and the health concerns and low popularity of President Joe Biden.

Of course, the sanctions by Western nations against Russia and the freezing of its foreign exchange reserves have been destructive to the Russian economy. And the removal of Russian banks from the international SWIFT system means the country is largely cut off from US dollar transfers. In the first quarter of 2022, about 59% of all global foreign exchange reserves allocated were denominated in dollars, with the euro in second place with 20%, according to IMF data.

The fact that other BRIC nations such as India and South Africa have joined Russia and China in building a new global currency to fight dollar hegemony is surprising. A coordinated global effort to replace the US dollar should not be rejected.

The signs have always been there. Once one of the largest holders of US treasuries, Russia has been selling US treasuries for the past five years. At the beginning of 2018, Russia held nearly $ 100 billion worth of US treasuries. That figure had steadily dropped to around $ 10 billion in early 2020, and by April 2022 it had dropped to just $ 2 billion.

During this period, Russia also accumulated gold reserves. Russia’s gold-buying rush began when it was sanctioned in 2014 for annexing Crimea, possibly including its plan to dethrone the US dollar as a global reserve currency. According to data from the World Gold Council, Russia’s gold holding stood at 2,302 tons in the first quarter of 2022, up from around 1,000 in 2014.

Immediately after sanctions against Russia began earlier this year, one of Moscow’s first responses was to force European countries dependent on Russian gas exports to pay in rubles or gold. Countries respected and bought rubles and sold euros. Interestingly, despite Russia defaulting on its debt, its ruble currency strengthened this year.

Is a new global reserve currency backed by commodities backed by China and Russia becoming a reality? I wrote in this column in March that it was a possibility, supported by analysis from Credit Suisse rate strategist Zoltan Pozsar and Jeffries macro strategist Sean Darby. Russia, after all, is a major supplier of commodities including oil, gas, gold and diamonds.

I then suggested that third countries could buy Russian oil at a discount from Russia or through China instead of paying a premium for oil of non-Russian origin. It could be the beginning of a new global order and all that China and Russia had longed for. On the tangential side, it is also a cost-effective way to expand the use of the digital renminbi.

RT claimed in July that that was exactly what had happened. Trade between Russia and other BRIC nations during the first three months of 2022 increased by 38% to $ 45 billion. Meanwhile, trade between Russia and China continues to grow, with Russia overtaking Saudi Arabia to become China’s No. 1 oil supplier, after Russian oil was sanctioned by most of the West. Other nations have also started accepting currencies other than “petrodollars” for exports, with Saudi Arabia and Iran accepting yuan for their oil.

The real question is what form this currency will take. For this currency to have any real value, it must be backed by more than the credit of the governments of the BRIC nations. It must be supported by reserves of goods.

Will other countries want to transact in this new currency? At first, that’s not likely. But the landscape could change over time; almost all major currencies today are fiat money based on nothing more than the faith and credit of the issuing country. As political and social foundations are eradicated and questioned around the world and if inflation continues to exacerbate, a new reserve currency backed by gold and oil, in other words, real assets, could be formidable.

Before declaring the dollar’s dominance over, it has several indomitable traits. The first is that as a currency it is strengthening as the Federal Reserve has started to raise interest rates. US financial markets remain the largest, safest, most liquid and most reliable market in the world to invest in. In addition, the stability and reputation of the US government and legal system make it preferable to hold US government bonds over other reserve assets.

But in the short term, the dollar is expected to remain a strong competitor in the reserve currency. Perhaps it is the euro and other currencies that need to be concerned.

The views expressed in this article are the views of the author and do not necessarily reflect the views of The Epoch Times.

Fan Yu

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Fan Yu is an expert in finance and economics and has been contributing analysis on the Chinese economy since 2015.

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