Brazil’s President Luiz Inácio Lula da Silva has called for developing countries to abandon the US dollar and strengthen their own national currencies. Speaking at the New Development Bank in Shanghai, Lula expressed his concerns about why all countries have to base their trade on the dollar. Recent discussions have focused on removing the US dollar’s status as the global reserve currency, and this idea is becoming more of a reality in 2023. President Lula has insisted that the greenback’s global dominance should end, and he was curious as to why countries depend on just one currency instead of using their own.
Lula’s statements come after China signed a new deal with Brazil and completed its first Liquefied Natural Gas (LNG) payment in yuan. Russia has also been committed to settling trades using other countries’ currencies. Moreover, BRICS members (Brazil, Russia, India, China, and South Africa) are working towards creating a new BRICS-based reserve currency. Financial Times reporters Joe Leahy and Hudson Lockett concluded their report on Lula’s statements by noting that any efforts to undermine the US currency “in the near term will face a substantial challenge”.
However, officials from Brazil and the BRICS nations are not alone in discussing the potential decline of the dollar’s dominance. The Philippines’ central bank governor, Felipe Medalla, recently mentioned in an interview that the greenback’s prominence will gradually diminish, as other currencies will eventually have the necessary international markets to support it.
Currently, the US dollar is the dominant currency for international trade and is used to settle the vast majority of international transactions. Moreover, most commodities are priced in dollars, including oil, gold, and silver. As a result, countries that import these commodities are forced to hold substantial US dollar reserves. This dependence on the dollar has given the United States a significant advantage in the international financial system. It has allowed the US government to finance its budget deficits by selling Treasury bonds to foreign central banks.
However, the US dollar’s dominance has also had negative consequences for the US economy. The US government has had to run large trade deficits to supply the rest of the world with dollars, which has led to massive debts. Moreover, the US dollar’s status as the global reserve currency has allowed the government to print money and monetize its debt without causing inflation. For example, during the 2008 financial crisis, the US Federal Reserve created trillions of dollars out of thin air to bail out the banking system.
If the US dollar were to lose its status as the global reserve currency, it would have a significant impact on the global economy and financial systems. Countries that hold large dollar reserves, such as China and Japan, would have to diversify their holdings into other currencies, such as the euro, yen, or yuan. This could cause a decline in the value of the US dollar, lower US interest rates, and possibly increased inflation.
In conclusion, the shift away from the US dollar as the global reserve currency is inevitable, as more countries seek to reduce their dependence on the greenback. It is difficult to predict when this will happen, but the recent discussions among Brazil, Russia, India, China, and South Africa suggest that a new world order may be emerging. The impact of this shift on the global economy and financial systems will depend on how well-prepared countries are to adapt to a new multi-currency world. However, it is clear that the days of the US dollar’s dominance are numbered, and countries that fail to recognise this may find themselves at a significant disadvantage in the future.