What is BRICS? How Does It Impact the Forex Market?
What is BRICS? How Does It Impact the Forex Market?
If you’ve been following global economic news in recent years, it’s impossible to ignore the increasing presence of BRICS on the global stage. This coalition of emerging economies has steadily gained influence, making headlines across both political and financial sectors. But BRICS is more than just a group of fast-growing markets. They are becoming a key force shaping the direction of the global financial system, with a particular impact on the Forex market, the largest currency trading market in the world.
BRICS is signaling a significant shift away from the dominance of traditional economic powers. From discussions on reducing the reliance on the U.S. dollar to promoting the use of local currencies in trade among member countries, these initiatives are creating shockwaves across the global financial system.
For investors, traders, and anyone monitoring economic developments, this is not a trend to overlook. If BRICS successfully implements these changes, it will have direct and far-reaching consequences on the Forex market and the global monetary system as a whole.
The message from BRICS is clear. The era of relying solely on Western economic powers may be coming to an end. As the world transitions toward a new economic balance, this shift will undoubtedly be one of the most crucial developments that investors must keep a close eye on.
So, What is BRICS?
Leaders attend the BRICS Business Forum in China on September 4, 2017. REUTERS/Kenzaburo Fukuhara
What happened in Europe two decades ago is a perfect example of regional cooperation aimed at creating a stronger economic foundation. Several European countries came together to form a single currency, the euro, which was designed to enhance economic stability and reduce trade barriers within the region.
The euro became a major success story. Today, it stands as the second most widely used reserve currency in the world, right after the U.S. dollar.
The BRICS coalition is attempting to achieve something similar. Their goal is to offer an alternative to the global financial system by reducing reliance on the U.S. dollar and strengthening economic stability within their own regions.
BRICS consists of five member countries:
- Brazil
- Russia
- India
- China
- South Africa
The name BRICS is derived from the initial letters of each member country. These nations are widely viewed as representing the world’s most prominent emerging economies, with the potential to reshape the global economic order.
However, BRICS is not just about economic cooperation. The group also focuses on political collaboration and trade partnerships, aiming to build a global financial system that is less dependent on Western powers and more inclusive of diverse regions and economies.
The Main Goals of BRICS
Many people may wonder, what is the purpose of BRICS? The primary goal of this coalition is to reshape the global economic balance, particularly by reducing dependence on the US dollar, which remains the dominant currency used in international trade.
The key objectives of BRICS include:
- Reducing reliance on Western economic powers such as the United States and the European Union
- Promoting trade among member countries by encouraging the use of local currencies instead of the US dollar for transactions
- Enhancing economic stability through the establishment of the New Development Bank, which provides funding for infrastructure projects within member countries
How BRICS Impacts Currency Values in the Forex Market
image source : expatmoney.com
The global financial system has long been dependent on the US dollar. Any changes related to the dollar will directly impact the Forex market, the largest currency trading market in the world.
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Reducing Dependence on the US Dollar (De-dollarization)
One of the clear objectives of BRICS is to reduce the role of the US dollar in trade among member countries. This means that, in the future, trade transactions may shift to local currencies such as the Chinese yuan (CNY) or Indian rupee (INR).
If de-dollarization becomes a reality, it will reduce demand for the US dollar in the Forex market, potentially weakening the dollar against other currencies.
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Using Local Currencies in Trade
BRICS is also discussing the creation of a shared currency to replace the US dollar in trade settlements.
If this shared currency is introduced, the Chinese yuan may play a more prominent role in the Forex market, given China’s large economic influence within BRICS.
Additionally, encouraging the use of local currencies like the Indian rupee (INR) or South African rand (ZAR) for trade could increase demand for these currencies in the Forex market and make them more volatile.
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The Establishment of the New Development Bank (NDB)
The New Development Bank (NDB) was created by BRICS to support infrastructure projects within member countries.
When the NDB funds a project in a specific country, it increases the demand for that country’s local currency, directly affecting its value in the Forex market.
For instance, if the NDB invests in India, there will be higher demand for the Indian rupee (INR), potentially strengthening its value. Similarly, projects in South Africa could boost demand for the South African rand (ZAR) in the Forex market.
Currencies Forex Traders Should Watch
President of China Xi Jinping arrives for the second day of the Summit at the Sandton International Convention Centre. [Photo: GCIS]
As BRICS continues to push forward with reducing reliance on the US dollar, Forex traders should keep an eye on the currencies of BRICS member countries that may play a more significant role in the future.
Key Currencies to Watch:
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Chinese Yuan (CNY): China is actively promoting the yuan as a primary reserve currency for BRICS, aiming to reduce the use of the US dollar in international transactions. If this effort succeeds, the yuan will become increasingly important in global financial markets.
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Russian Ruble (RUB): The ruble is heavily influenced by energy exports, particularly oil and natural gas. If energy prices rise, the ruble is likely to strengthen accordingly.
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Indian Rupee (INR): India is one of the fastest-growing economies in the world, with a large population and rapid technological advancement. If the country continues to attract foreign investment, the INR is expected to appreciate in the long term.
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Brazilian Real (BRL): Brazil relies on commodity exports such as oil, coffee, and minerals. If the prices of these commodities increase, the BRL is likely to stabilize and strengthen.
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South African Rand (ZAR): The ZAR is influenced by the country’s gold and mineral exports, which are key commodities for South Africa. If global gold prices rise, the ZAR has the potential to appreciate as well.
Impact on Major Currency Pairs in the Forex Market
Changes within the BRICS group may have a significant impact on major currency pairs in the Forex market, especially those involving the US dollar, which remains a key global currency. If demand for the dollar decreases, these pairs will need to adjust accordingly.
- EUR/USD: If the use of the US dollar declines, the euro (EUR) may strengthen, as the European Union also aims to reduce its reliance on the dollar in global trade and financial transactions.
- USD/CNY: A reduced role for the US dollar in international transactions could lead to an appreciation of the Chinese yuan (CNY). If China successfully promotes the yuan as a major reserve currency, it is likely to gain more value against the dollar.
- USD/INR: If India becomes a key economic hub within BRICS, the demand for the Indian rupee (INR) will increase. This could result in the rupee strengthening against the dollar as India's role in the global economy expands.
Summary of BRICS Impact on the Forex Market
While changes within BRICS are still developing and require close observation, the signals are clear: the structure of the global financial market is shifting. Forex traders should be prepared to adapt to these changes as they unfold.
BRICS may not transform the world overnight, but their actions are sending a strong message — the role of the US dollar is diminishing, and a new balance in the global financial system is emerging. This is a development that cannot be ignored.
🕘14 Jan 2025 | 4:30 PM
Note: This article is intended for preliminary educational purposes only and is not intended to provide investment guidance. Investors should conduct further research before making investment decisions.
Cover Image Source Credit...Phill Magakoe/Agence France-Presse — Getty Images
