The leaders of Brazil, Russia, India and China (BRIC) are meeting today in Russia to discuss issues ranging from the financial crisis to climate change. The US Dollar's role in their foreign exchange reserves and cross-border trade is also on the agenda of the meeting.
Recently Russia, China and Brazil have expressed the need for having an alternative to US Dollar -- in view of the soaring US debt -- and have decided to invest in IMF bonds, a move to diversify their dollar-heavy currency reserves. IMF bonds are denominated in Special Drawing Rights, or SDRs. India has so far been non-committal on this issue.
BRIC nations hold a total of $2.8 trillion in international reserve assets (excluding gold) -- about 42% percent of the world's total. Further, these countries comprise about 15% of the world economy, 40% of the world's population and output (in purchasing power parity terms), and thus there is a thinking that the group has the potential to lead global economic growth.
Brazil, India and China have also weathered the global financial crisis better than the rest of the world.
China is U.S.'s biggest foreign creditor, holding an estimated $1 trillion in U.S. government debt. In view of their large holdings, the Chinese have been considerably more careful than the Russians in talking about potential alternatives to the dollar, since such comments could undermine the value of their dollar assets. China continues to add dollars to its reserves in order to prevent the appreciation of its currency, which would hurt its exports.
In addition to discussing how to reduce dollar assets in their existing reserves, the BRIC nations are also trying to limit the use of the dollar in their bilateral trades. China signed a deal with Brazil last month, which would allow some bilateral trade transactions to be conducted in their respective currencies.
While these nations seem to be united in their apprehension about the dollar, there are a lot of conflicting interests and disagreements over various other issues. The nature and composition of their economies are also very different.
China and India have sizable labor resources, while Russia and Brazil are rich in natural resources. China is the main importer of natural resources, while Russia and Brazil are the main exporters. While China and India benefit from lower oil prices, Russia and Brazil seek higher oil prices. There is also a huge competition among the BRIC nations for foreign capital and investment.
Further, even taken together, BRIC economies are smaller than the US economy and as such their influence is rather limited as of now -- though it is rising rapidly. Also, the reality remains that there is no immediate alternative to the US Dollar, as no other markets in the world have the depth and liquidity of those in the US.
Emergence of an alternative reserve currency or a basket of currencies could take many years. So, there is no immediate threat to the US Dollar's role as the world reserve currency, and any outcome of the meeting will be more symbolic at present.
However, if there are significant negative comments on the dollar or signals of shifting the reserves composition away from the dollar (which seems to be a less likely outcome in the present circumstances), it could weigh on the US currency. Companies that derive a significant portion of their revenue from their overseas operations, like McDonald's
(MCD - Analyst Report
(KO - Analyst Report
(PEP - Analyst Report
), Procter & Gamble
(PG - Analyst Report
) and Colgate-Palmolive
(CL - Analyst Report
) benefit from any weakness in the US Dollar.