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It’s a shame that market pundits have been busy scandalising JP Morgan’s involvement with the late, notorious sex trafficker Jeffery Epstein — especially after a US judge’s approval late last month of a $290 million settlement with women who were abused by him — and betting if, rather when, the axe would fall on chairman and CEO Jamie Dimon; the longest serving head of any major Wall Street outlet. Otherwise they would have paid more attention to the other major headline coming out of America’s biggest bank.

JP Morgan’s strategists admitted in a report released in early June that there were “signs of de-dollarisation unfolding in the global economy”, although the currency “should maintain its long-held dominance for the foreseeable future”. A month earlier, in the beginning of May, another Wall Street giant (though now smaller than JP Morgan) Goldman Sachs raised similar concerns and reached similar conclusions.

That while the dollar’s share of FX trading volumes remains just short of record highs at 88 percent and its use in trade invoicing has not really changed in 20 years, scratching beneath the surface “reveals a more bifurcated picture”. The pressure of steeply rising interest rates along with sanctions that freeze Russia out of the international banking system seem to have forced a new play by BRICS nations – Brazil, Russia, India, China, South Africa – that could, in the long run, ultimately pose a challenge to King Dollar’s undisputed post-WWII reign.

A few trends provide interesting insights.

Dollar’s share of global central bank reserves is already shrinking; down from 72pc in 2002 to 58ps in 2022. Lately, the energy trade has also started to inch away from the greenback; something not thinkable before the Ukraine war. A number of countries, including Pakistan and India, have been buying Russian oil and gas in the Chinese yuan.

India has also made payments in UAE dirhams, with a contingency in place to pay in INR (Indian rupee) if there are future sanctions on the dirham. Saudi Arabia and China are in talks to settle Chinese oil payments in the yuan. Brazil and China have announced the phase-in of a yuan clearing agreement. And Beijing has announced that now most of its trade with Moscow is also in yuan.

To top it all, the Russians have just leaked that BRICS countries might finally announce a roadmap to the launch of their new currency during their summit in August; and that it would “most probably be backed by gold”, sparking an intense debate about a possible re-repeat performance of the Gold Standard, though on a much more limited scale.

Think about it. The geopolitical implications of the energy trade out of the dollar are significant; especially if China, the world’s largest oil importer, is not just on board but in the driving seat. Now it’s bent upon expanding BRICS, expressing interest last year in admitting new members.

There are reports that about 20 counties have already lined up to join the platform, including Saudi Arabia, Argentina, Egypt, Iran, Turkey, the UAE, Thailand and Venezuela. Just a few days ago Ethiopia, one of Africa’s fastest-growing economies, also asked to join.

If there is some truth to Russian rumours and BRICS countries go ahead with their gold-backed currency and its members, at least, use it to buy their oil and gas, then much of the global energy market will no longer be in dollars.

Why, then, would central banks want to go on holding so much of their reserves in the greenback? BRICS will surely lead in cutting dollar holdings, giving smart ideas to others at the same time. And even though there’s no threat to King Dollar’s throne just yet, the percentages will change.

Suddenly, it makes a lot of sense that while the dollar share of global FX reserves was shrinking, that of gold rose to 15pc from 11pc just five years ago. This is, of course, just the start of a very long process. JP Morgan and Goldman Sachs analysts are right to conclude that while “some signs of de-dollarisation are emerging”, the dollar still maintains its “large footprint” and talk of its demise is a “popular headline and unlikely story”.

Still, if BRICS countries really announce the new currency next month, it will be like that old Biblical story where the child that was prophesised to overthrow the pharaoh would be born, and slowly growing and getting stronger.

If that does happen, come August, buy gold!

Copyright Business Recorder, 2023

Comments

Comments are closed.

Adi Jul 13, 2023 07:09am
Pass me some of what you are smoking. The US sanctions have forced people to think of work arounds and the US may definitely have overreached by weaponising SWIFT et al. But the idea that we can transact global trade back by gold is laughable! It’s not the 1920s - trade between India and China alone is in Billions!! The conversation around Gold and BRICS countries is revealing of the mistrust. Will India every accept Yuan in the mid-term? Will China cease manipulating its currency? The de-Dollarisation may eventually happen but one cannot see what will replace it. Certainly not the Yuan or Gold!
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Ahsan Iqbal Chor Jul 13, 2023 10:41am
@Adi , maybe the Pak rupee esp since our establishment has said pakistan will soon be a trillion dollar economy very soon. If i were you, i would sell all FX and buy PKR !
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wanker Jul 14, 2023 12:21am
China wants to promote it's own currency and is not going to support a competitor to it.
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JS Jul 14, 2023 12:48am
@Adi , a gold and commodities backed currency is certainly possible. Whether the trade is in billions or trillions makes no difference except to the respective price of regional currencies in relation to that of gold. The Saudi's are in the process of building a gold refinery. UAE is launching its own gold exchange similar to the Comex and LBMA. And Shanghai Gold exchange is already in operation. China is the largest miner of gold but does not export any - i.e. the govt has been stacking it for years. Couple this with the fact that the Russian central bank had already de-dollarized pre-war but holds plenty of gold. This entire process had already been in play for the past decade - it is only now being materialized. A gold backed currency won't be Yuan backed by gold, but rather similar to the SDR basket of currencies albeit replaced with a basket of commodities.
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Laraib Jul 14, 2023 01:28pm
India backed out.
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E Jul 14, 2023 05:45pm
@wanker, they have mo choice butvto support used as they hold trillions in usd treasuries. If Chinese decide to dump these the prices will go down for these treasuries and China will also lose die to devaluation of these assets. However they have no choice any longer. The Chinese and other bricks nations have to act. The weaponisation of usd has been going on for far too long.
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