BNY Mellon Investment Management: Is the dollar untouchable?

The US dollar’s dominance is being questioned. But BNY Mellon Investment Management head of Asia macro and investment strategy Aninda Mitra thinks the currency remains untouchable.

Despite gathering momentum to expand the BRICS group of countries (Brazil, Russia, India, China and South Africa) into a wider bloc and develop a currency to rival the US dollar, the greenback’s role as the world’s foremost reserve currency is unlikely to be undermined anytime soon, says BNY Mellon Investment Management head of Asian macro and investment strategy Aninda Mitra.

‘De-dollarisation’ refers to the move by certain countries towards reducing reliance on the US dollar as a reserve currency. As part of this, some emerging market (EM) countries are increasingly seeking to use their own currencies to settle their bilateral trade, with the Chinese yuan featuring heavily.

The BRICS group has reportedly been pushing for a so-called ‘R5’ common currency[1]. More recently, at the BRICS summit in South Africa in August, six countries – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates – were invited to join the BRICS bloc[2] to rival the G7 countries of US, Japan, Germany, UK, France, Italy and Canada.

According to Mitra, who is part of the BNY Mellon IM Global Economics and Investment Analysis (GEIA) team, the accumulated economic size of the upsized group (BRICS+), adjusted for purchasing-power parity, is now bigger than the G7 economies. This, he adds, could give BRICS+ extra financial and geopolitical clout on the world stage, but he thinks aspirations of challenging the US dollar with a rival currency are far-fetched.

De-dollarisation impetus

Mitra believes the de-dollarisation trend has been exacerbated by Russia’s invasion of Ukraine and the repercussions for the developing world of a huge country being sanctioned on such a large scale. The freezing of Russia’s reserves drove a scramble for gold and countries attempting to settle their trade in their own currencies, adds Mitra. He notes Russia and China hold US$143bn and US$130bn, respectively, in gold in official reserve assets.

“The shock effect from the enforcement of sanctions on Russia, especially by G7 or G10 countries, is causing this bunching together of a disparate group of countries with the interest of enhancing their bargaining power in global multinational forums,” he says. “Just as advanced economies are seeking to enforce sanctions and boost supply chain resilience, emerging markets are seeking to insulate trade settlement capabilities and diversify reserves.”

Mitra notes an example of de-dollarisation in action can be seen in an increase in exports from the BRICS nations to other emerging markets, while the bloc’s exports to developed nations have been decreasing. The rising volume of trade between EMs has allowed many developing countries to boost bilateral trade settlements, he adds.

Another example is the heavy use of China’s Cross-border Interbank Payments System (CIPS) in Chinese yuan-dominated trade with Russia[3]. In September, it was reported that Chinese lenders stepped in to lend billions of dollars to Russian banks in the wake of the invasion of Ukraine[4]. 

Meanwhile, China and Brazil have been exploring bilateral currency arrangements to settle trade and facilitate investments[5]. Elsewhere, Saudi Arabia is reported to be considering accepting the Chinese yuan instead of US dollar as payment for some of its oil exports[6].

‘Exorbitant privilege’

But according to Mitra and the GEIA team, the US dollar’s “exorbitant privilege” as an international means of exchange, provider of liquidity and store of value remains intact for the foreseeable future. This is because the US dollar is well-entrenched in the global financial ecosystem thanks to the US’s historical geopolitical alliances.

According to the IMF, the US dollar accounts for 59% of the world’s currency reserves, followed by the euro at 19.8% and the Japanese yen at 5.5%, while the Chinese yuan accounts for just 2.6%[7]. The US makes up 25% of the world’s GDP with China representing 18%[8]. The US also accounts for the bulk of FX turnover, international bond issuance and cross-border loans, notes Mitra.  

He says in recent years the appreciation in the trade-weighted exchange rate value of the US dollar is not as high as the peaks last seen in the early 1980s and early 2000s. But the appreciation trend (above a 10-year moving average) has been underway since August 2014. That’s its longest streak since data became available in the late 1970s. “That alone tells you there are no competitor currencies which can step up to counteract the dollar, impart global economic strength and, in doing so, risk a loss of their own external competitiveness,” says Mitra.

“Even with an incremental ease of its use over a longer time horizon, the dollar is likely to remain the single-most important currency in international trade and finance,” he adds. “The Chinese yuan’s use in trade invoicing is poised to rise, but it will ultimately need deep institutional or policy-regime changes to truly morph into a ‘reserve’ asset.”

BRICS+ lacks consensus

Mitra thinks an expanded BRICS+ bloc could raise its collective bargaining power within certain entities dominated by the G7 such as the IMF and the World Bank. He also believes China may seek to project its influence by touting the enlarged bloc as an alternative to the G7 in setting global priorities and standards.

But he notes there are different interests at play that could work against the expanded entity. A lack of consensus especially among the biggest members, notably India and China, could stall the efforts of BRICS+ to thrive, adds Mitra.

As for creating a common currency to rival the US dollar, he adds: “You need a central bank to back it up by pooling monetary sovereignty. Who is going to be backing it? It seems very speculative at this point.”

Implications for markets

Mitra says it is tricky to discern any near-term market implications from this development. Aside from the BRICS+ group lacking a clear objective or set of criteria to drive its membership or agenda, there are unanswered questions such as why the six nations were admitted rather than other key developing markets such as Mexico or Indonesia.

Additionally, the action came with no clear announcement of de-dollarisation or other mechanism to boost the circulation of member countries’ currencies.

“The expansion of the BRICS membership looks interesting, but does it move the needle very much on anything of importance such as global growth, policy, or exchange rates? Not really,” he says. 

Overall, Mitra says the GEIA team recognises that intense efforts among certain nations to boost their own currency trade settlement will persist, especially at dominant exporters and manufacturers like China.

“But even then, the status of the dollar seems anchored by the dominant currency paradigm; the US’s wide network of military alliances and its geopolitical pre-dominance; and the lack of alternative ‘safe’ and ‘liquid’ assets,” he concludes.

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