There’s talk going around about BRICS creating a new gold-backed international currency, sparking fears that it could spell trouble for America and the dollar as the world’s main currency.
If you trade gold and other US-related assets, you might want to read on.
Developing nations are growing vary of America’s financial dominance, especially with the recent sanctions from Russia.
There was a time when currencies were backed by gold. The more gold a nation has, the more money could be printed.
When the Bretton Woods agreement came into force, the US became a major economic power after World War II. The international monetary system that was set up by 44 allied nations viewed the USD as a safe currency to keep as reserves.
Under this system, gold was fixed at $35 per ounce. Countries sent lots of gold to the US, where the Treasury kept it safe. Central banks could trade their extra USD for gold whenever they needed to.
However, things took a turn when the United States faced a trade deficit, resulting in a massive outflow of USD. When President Nixon announced the suspension of the dollar’s convertibility into gold, the world was shocked.
It was a dirty move played by the US that many have seemed to forget.
As today’s currencies aren’t backed by tangible assets, countries could print more money as needed—sometimes excessively. This is one reason why inflation is rampant in certain areas.
The appeal of having a common currency among the BRICS countries is obvious.
Imagine having an independent currency that remains neutral and not pegged to any country or government. It’s a new trade route with opportunities for the BRICS countries. They no longer must trade away precious commodities to receive stacks of paper money that could lose its value overnight.
The US has the world’s largest national debt, built on a system that could collapse like a house of cards. As trillions of dollars are printed and dispatched to balance international debt, the value of USD sees a disturbing drop.
In Episode 2 of Traders Brew podcast, Beam Chanat, market analyst of VT Markets deep-dives into the topic of central banks and quantitative easing.
Click here to listen to the podcast
The idea of a common currency among the BRICS countries — Brazil, Russia, India, China, and South Africa — has raised questions about how it could affect forex trading.
1. Shift in currency pairs
For forex trading platforms, a BRICS common currency could mean changes in the currency pairs they offer. Instead of the usual individual pairs with BRICS currencies, platforms might start featuring pairs with the new common currency. Traders would need to familiarise themselves with these changes and learn how to analyse the new pairs effectively.
2. Less volatility on exchange rates
For forex traders, a BRICS common currency could make things a lot easier. Right now, exchange rates between different currencies can change quickly, which makes trading tricky. But with a common currency, traders wouldn’t have to monitor these fluctuations between BRICS countries. This could make trading more stable and predictable.
3. Impact on economic data
Forex trading depends a lot on economic data like interest rates, inflation, and economic growth. If there’s a common BRICS currency, data from these countries would become even more important for traders. Changes in one BRICS country’s economy could affect the common currency, influencing trading decisions across the board.
4. Higher demand for gold-backed currencies
Gold is an obvious asset that will be affected, so traders should observe the movements of XAUUSD. Another easy and obvious alternative could be investing in gold-backed cryptocurrencies, but a ‘crypto’ approach to the BRICS currency hasn’t been talked about publicly yet.
It’s still too early to predict when a BRICS currency will be released as we are still in the phase of economic shift and exploration. In a financial paradigm shift, it’s wise to stay informed and adaptable on the true rival to the dollar.
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