Dollar's Dilemma: The Rising Tide Of BRICS-Led Dedollarization

• US policymakers should be concerned about a BRICS-led dedollarization, Thomas Hill wrote for the Atlantic Council.

• New members can provide BRICS with new trade affiliations to promote dedollarization.

• "Collectively, the expanded BRICS network via these trade organization connections now eclipses 90 countries."

The recent expansion of BRICS should be a key cause of concern for the US, as new members along with countries who want to join could amplify dedollarization, according to a former State Department official.

Writing for the Atlantic Council, Thomas Hill noted that Egypt, among others, was added to the BRICS club while Algeria and Tunisia were turned down.

And it foreshadows how North African countries may become some of the "most aggressive advocates" for de-dollarization, he warned.

"The BRICS-led dedollarization effort should alarm US policymakers, especially in light of the recent BRICS membership expansion," wrote Hill, who is currently the director for the North Africa Program at the US Institute of Peace. "It is clear that traditional US allies, such as Egypt, Saudi Arabia, and the UAE, are already exploring ways to dedollarize, and that Beijing is helping that process move forward."

This year, the economic bloc — originally composed of Brazil, Russia, India, China, and South Africa — has touted plans to take on the greenback's dominance in the global financial system.

While BRICS' attempts to replace the dollar's hegemony have had limited impact so far, the coalition also elected to admit six new states in August, creating an opportunity for greater global coordination, Hill explained.

He added that they will provide BRICS with access to fresh trade affiliations that can promote alternative currencies.

"By including Egypt, BRICS can influence Algerian and Tunisian de-dollarization through Egyptian leadership inside existing trade regimes. Through Egypt, the UAE, and Saudi Arabia, BRICS will have expanded access to the Greater Arab Free Trade Area (GAFTA) and the Common Market for Eastern and Southern Africa," Hill wrote. "Collectively, the expanded BRICS network via these trade organization connections now eclipses 90 countries."

Signs of change are showing. In October, Egypt issued yuan-denominated panda bonds to help pay its debt, while the Bank of Russia now includes the Egyptian pound among currencies used to set ruble exchange rates.

Elsewhere, a joint effort between China, Hong Kong, Thailand, and the UAE looks to develop a digital currency platform that will create a digital yuan for cross-border payments, Hill said.

Even a partial weaning off the greenback will likely weaken incentives to stick to the SWIFT finance mechanism, an international banking network that has been used by the US to apply sanctions. 

Global coordination against the dollar would also impact US fiscal health, limiting the country's ability to run large federal deficits and keep debt costs grounded, Hill said.

"For US policymakers, the BRICS de-dollarization effort should cause concern," he said, adding that the federal government needs an interagency process with backing from lawmakers.

Originally published by: Filip De Mott on Markets Insider