Why Is the Dollar Gaining Strength?

There are several key factors behind the dollar’s rising dominance in global payments. Most importantly, the US Federal Reserve’s tight monetary policy plays a central role. The Fed’s decision to keep interest rates high continues to attract investors to the dollar, putting pressure on the currencies of emerging markets.

Additionally, increasing geopolitical risks push global investors toward the dollar as a safe haven. The Russia-Ukraine war, uncertainty in the Middle East, and trade tensions in Asia have made the dollar even more indispensable in global transactions.

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What Will Be the Economic Consequences?

The dollar’s overwhelming dominance in global payments may create various effects on different countries:

• For emerging economies, the cost of external borrowing could increase further. Countries repaying debts denominated in dollars may face significant budget deficits.
• The US dollar’s supremacy in global trade could reduce the usage of other currencies, potentially weakening other reserve currencies like the Euro and Yen.
• For the US economy, high demand for the dollar could widen the trade deficit. However, this could also strengthen demand for US bonds and assets in the short term.

Is This the Start of a New Financial Era?

Experts argue that the dollar’s growing dominance further consolidates the dollar-centric structure of the global financial system. This development may accelerate the efforts of some countries to create alternative payment systems. In particular, BRICS countries are working on new strategies to reduce their dependence on the dollar.

Still, in the short term, a significant decrease in dollar dependency seems unlikely. On the contrary, the dollar’s dominance in global transactions may deepen even further.

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In meetings this week, BRICS decided to develop a new payment system based on national currencies, moving away from the dollar-based SWIFT system. According to “Crypto is Macro Now” newsletter author Noelle Acheson, Bitcoin is unlikely to become a favored currency among BRICS nations, yet these de-dollarization efforts could benefit Bitcoin.

Acheson stated, “Weakening global demand for dollar-based trade could pull the dollar down, potentially increasing Bitcoin’s appeal as a hedge against depreciation.” She highlighted that BRICS nations share economic and geopolitical grievances against the U.S., fueling their drive to create an alternative to the dollar.

BRICS’ stance against dollar dominance isn’t surprising, given the combined economic power and influence of these countries in global trade. While the dollar is unlikely to lose its reserve currency status immediately, this shift could positively impact Bitcoin.

Acheson noted that BRICS’ attempt to reduce reliance on the dollar may increase demand for value-storing assets like Bitcoin. Crypto supporters argue that Bitcoin’s limited supply and independence from traditional markets provide a hedge against uncertainties.

BRICS unseating the dollar in the short term is unlikely. However, their search for alternatives could signal significant changes in economic and geopolitical realities. Russian President Vladimir Putin’s comment that it’s not yet time for a unified BRICS currency underscores the challenges of this process. As a result, discussions around Bitcoin’s future role and value seem poised to intensify.

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• The group will create a blockchain-based payment system as part of a special task set for this year to increase the role of BRICS in the international money system.

According to a report by Russian news agency TASS, the BRICS group of five countries, Brazil, Russia, India, China, and South Africa, will begin work on developing a payment system based on blockchain and digital technologies.

Kremlin advisor Yury Ushakov emphasized the importance of creating an independent BRICS payment system in an interview with TASS, saying, “As BRICS countries, we believe that it is a significant future goal to create an independent BRICS payment system using the latest technologies such as digital technologies and blockchain. It is important to ensure that this system is easy to use, cost-effective, and independent of politics for governments, people, and businesses”

This initiative is part of a special task set for this year to increase the role of BRICS in the international money system. The group has long been trying to reduce its dependency on the US dollar in settlements, a strategy also known as de-dollarization.

Ushakov also noted that work on developing the Contingent Reserve Agreement, particularly focusing on the use of currencies other than the US dollar, continues.

Last week, according to a TASS report, the Russian Ministry of Finance, the Central Bank of Russia and BRICS partners announced that they will be creating the Bridge multi-payment platform to improve the global money system.

Additionally, in February, Klaas Knot, the President of the Financial Stability Board, which monitors the global financial system, still pointed out topics such as crypto assets, tokenization, and artificial intelligence (AI) as priorities to the finance ministers of the G20 countries.

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