This report originally appeared in the September 2009 issue of DOTmed Business News
The American dollar could be replaced as the World Reserve currency by a combined currency from Brazil, Russia, India or China, collectively as the BRICs. These countries have large economies and are outgrowing their emerging-market status. So will they replace the American dollar, and if so, when does this happen?
There are four currencies involved in BRIC - the Chinese Yuan, the Brazilian Real, the Russian Ruble and the Indian Rupee. Though these countries could possibly create a common currency, similar to the Euro, this would be difficult to accomplish. If you doubt this, try to imagine how an authoritarian Russia will work with a doctrinarian Communist China, a Democratic India, and an unstructured Brazil. The combination would be hard to see emerging with any clear Asian-European-Latin American consensus. Even if the dollar were not replaced by a BRIC currency, it could still be swapped out for another currency.
The current advantage to having the American dollar as the world reserve is that we have the luxury of borrowing in our own currency. We can always print more money, while other countries do not have the option of influencing the money supply. But, by having the world reserve's currency, our monetary policy is also compromised by other countries trying to pull the dollar toward their own currencies.
Overall, BRICs lack the economic fitness to handle the responsibility of the world reserve; however, if BRICs start to talk about replacing the dollar, there could be a major re-pricing of commodities as investors lose confidence. The buzz and fear around a possible BRIC replacement for the dollar has more to do with a political and economic power struggle than with getting a stronger currency as the world reserve. The BRICs have to threaten the possibility if they want to be taken more seriously and seen as real economic powerhouses on the world's economic stage.
The BRIC countries will likely pursue the replacement of the dollar as the reserve currency. However, this is not the same as saying they will achieve it. The likelihood is that they will not. This is largely because of economic and political limits to the BRIC countries.
The challenge for BRIC is to reproduce the once solid stability of the American dollar and not to emulate the relatively tarnished Euro. More challenging is how BRIC will replace the dollar without debasing the significant dollar reserves and dollar-denominated investments of those countries, and without harming the still delicate U.S. economy, and without hammering the many futures markets that are based upon common U.S. pricing.