De-dollarization: BRICS Threatens $2.5 trillion USD Sell-Off

The dominance of the US dollar in global finance is facing a notable challenge as the BRICS economic alliance (Brazil, Russia, India, China, and South Africa) contemplates a massive sell-off of their dollar-denominated assets. This strategic move,potentially involving the dumping of approximately $2.5 trillion, coudl trigger considerable shifts in the international economic landscape.

Dollar Under Pressure: A “Tsunami” of Sales?

According to Stephen Jen, CEO of Eurizon SLJ Capital, the US dollar is facing considerable pressure from the BRICS nations and other emerging Asian economies. Jen cautions that these nations could unleash a tsunami of sales, potentially offloading around $2.5 trillion in american dollars.This potential divestment is rooted in years of accumulated dollar reserves from trade surpluses and foreign investments.

“The scale of potential dollar sales by BRICS and other nations could destabilize currency markets and impact the value of the dollar considerably.”
Stephen Jen, CEO of eurizon SLJ Capital

The De-dollarization Agenda: A Response to Geopolitical Tensions?

The BRICS nations’ push for de-dollarization is not new, but it has gained momentum in recent years amid growing geopolitical tensions and a desire for greater economic independence. the recent decline in the dollar’s value, approximately 8% since February, has further incentivized these nations to accelerate their efforts to reduce reliance on the US currency. This depreciation makes dollar-denominated assets less attractive, prompting a search for alternative investment options and reserve currencies.

Economic Ramifications for the United States

A large-scale dollar sell-off by BRICS nations could have far-reaching consequences for the US economy. A significant decrease in demand for the dollar could lead to further depreciation, potentially triggering inflation and increasing the cost of imports. Moreover, it could raise borrowing costs for the US government, impacting its ability to finance its debt.The potential liquidation of assets by foreign holders could also destabilize financial markets and trigger a recession.

According to the International Monetary Fund (IMF), the dollar’s share of global reserves has been gradually declining over the past two decades, from over 70% in 2000 to around 58% currently. This trend suggests a gradual shift away from the dollar as the world’s primary reserve currency, and a coordinated sell-off by BRICS nations could accelerate this process.

Alternatives to the Dollar: Exploring New Financial Landscapes

As BRICS nations seek to reduce their dependence on the dollar, they are exploring alternative currencies and payment systems. This includes promoting the use of their own national currencies in trade settlements and developing alternative financial infrastructure to bypass the SWIFT system. The creation of a BRICS-backed currency has also been discussed, although its feasibility and potential impact remain uncertain.

Asia’s Embrace of local Currencies: A Move Away from the Greenback

A notable trend is emerging across several Asian economies: a intentional move away from reliance on the U.S. dollar. Fuelled by the increasing economic strength of BRICS nations and other developing countries, this “de-dollarization” is seeing nations like Taiwan, Malaysia, and Vietnam reduce their dependence on the American currency. These economies, often characterized by external surpluses, possess a financial cushion that mitigates the impact of U.S. dollar fluctuations.

The Economic Allure of Local Currencies

The shift is further propelled by a growing perception among Asian exporters and investors that their own currencies are performing competitively, if not better, than the U.S. dollar. This sentiment is echoed by experts like Jen,who points to a fundamental “imbalance” that diminishes the dollar’s long-term appeal. The attractiveness of local currencies is bolstered by their debt-free nature and the establishment of mutually beneficial trade relationships within the region.

An significant imbalance… weakens the attraction of the dollar in the long term,making local coins more attractive due to their debt -free nature and mutually affordable trade relationships.
– Jen, Economic Analyst

Potential Repercussions for the U.S. Economy

The implications of this de-dollarization trend for the U.S. economy are potentially significant. A sustained decline in dollar usage could trigger a sell-off of U.S.assets held by foreign entities. Recent market data reflects this concern, with the American dollar index reportedly declining by over 8% since the start of the year, hitting a three-year low. This vulnerability underscores the importance of maintaining the dollar’s global standing.

The Broader Context: BRICS and the Global Financial Landscape

The de-dollarization movement is closely linked to the rise of the BRICS nations (Brazil, Russia, India, China, and South Africa) and their ambition to reshape the global financial order. These countries are actively promoting the use of their own currencies in international trade and investment, seeking to reduce their reliance on the U.S.dollar and the euro. This trend reflects a broader shift towards a multipolar currency system, where no single currency dominates global finance.