When trade between two BRICS countries rises, the US dollar becomes the first casualty. BRICS is laying the foundation and groundwork for an upcoming battle between local currencies and the US dollar. The BRICS countries have maintained their positions as prime trading partners and are signing new trade deals this year. The new trade agreements give more importance to local currencies and not the US dollar.
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BRICS is slowly yet steadily cutting ties with the US dollar, and the latest changes made in trade agreements show that local currencies are given the most importance.
Just recently, China and Saudi Arabia signed a trade agreement that favors their local currency the Saudi Riyal and the Chinese Yuan ahead of the US dollar. The three-year agreement allows trade to be settled in local currencies with a cap of 50 billion Yuan or 26 billion Riyals, which is equivalent to $7 billion. Read here to know how many sectors in the US will be affected if BRICS completely stops using the dollar.
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Therefore, China and Saudi Arabia will settle cross-border transactions in local currencies up to $7 billion. The US dollar will play no role in settlements in the new currency swap deal until it reaches $7 billion. The move indicates BRICS’ willingness to move away from the US dollar and promote local currencies for global trade.
BRICS: US Dollar Vs Local Currencies
This is only the beginning of the battle between BRICS local currencies and the US dollar. The BRICS alliance could introduce many more trade deals in the future that do not require the US dollar as payment. If the trend of settling cross-border transactions in local currencies becomes larger, the US dollar will be the biggest casualty.
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The US dollar will lose out in the supply and demand dynamics in the global currency markets. Local currencies could perform better than the US dollar and narrow its path to fund its deficit. The ongoing debt crisis in the US could make matters worse for the American economy.
In conclusion, trade initiated anywhere between BRICS and developing countries in local currencies is like a hit in the head against the US dollar. The next few years will decide the fate of both local currencies and the USD.