Ditching The Dollar

Last week, China and Brazil ditched the dollar in trade deals choosing to trade in their own currencies - reais for Brazil, the land of the middleman, exchanging directly to Chinese yuan, cutting out the traditional trade deal middleman – the US dollar. In a series of such deals recently, between Tanzania and India, Kenya in their deals with Saudi Arabia’s Aramco and the UAE’s ADNOC, the US dollar has been bypassed altogether.

Brazilian president Lula da Silva t

Long the standard for such international deals, the US dollar is seemingly suddenly being dropped from its pedestal, pushed aside in what appears to be a domino effect amid Brics and those of the Global South.

Over the last decade, China and Brazil’s bilateral trade volume has grown to over $150bn last year, according to the Financial Times.

Newly elected left-wing Lula, Brazil’s President, reportedly gave an impassioned speech at the opening of what is dubbed the BRICS bank, or the New Development Bank in Shanghai. “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?” he said, suggesting they trade in their own currencies.

Back in January, Lula suggested during his first state visit to China, that the Brics (Brazil, Russia, India, China and South Africa) to come up with their own alternative currency for use in trade.

Outside of bilateral trade agreements and state-owned companies’ transactions, with a mutual desire to strengthen their own currencies, Brazil’s real and in China’s case, the renminbi, the likely challenge to a full drop of the dollar are private sector commodity traders.

Vital to global benchmarks and commodities markets, Brazilian mining majors are likely to want to keep most transactions dollar-denominated. Many international capital markets are denominated in USD, making it easier for some Global South countries to access global capital markets and attract foreign investment.

The USD is considered a stable currency with a relatively predictable value, making it easier for to plan and budget for international trade deals, reducing the risk of currency fluctuations and uncertainty.

As more African countries announce large trade deals in currencies other than the US dollar, every country will be looking back, as well as forward. There had been an ongoing debate about the benefits and drawbacks of African nations dropping their peg to the USD. On the one hand, some argue that dropping the peg to the USD could increase economic independence, reduce exposure to external shocks, and provide more flexibility in monetary policy. On the other, dropping the peg could result in increased volatility and inflation and could undermine investor confidence and result in a decrease in foreign investment.

To mitigate the impact of the domino adoption from developing nations of any currency but the US dollar, one approach could be greater cooperation and coordination between central banks, particularly on issues such as exchange rate policies and capital flows. The current climate could also force the “North” or “West” to rethink their perceived dominance and cooperation in general, to a more equal footing, as many countries and continents would see it.