South American Common Currency Poses Another Threat To US Dollar… Or Does It?

Brazil and Argentina will announce this week that they will begin preliminary work on a common currency, yet again another stride of de-dollarization for major global economies.

In a Financial Times report, the plan is reportedly set to be discussed at a summit in Buenos Aires, aimed at a developing a new currency to “boost regional trade and reduce reliance on the U.S. dollar.”

“There will be . . . a decision to start studying the parameters needed for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” Argentina’s economy minister Sergio Massa told the Financial Times.

Brasília suggests calling the currency “sur”–Spanish for “south”–as a nod to the South American region.

The initiative, which began as a bilateral project, would later be expanded to invite other Latin American nations, according to the report, which added that an official announcement is expected during Brazilian President Luiz Inacio “Lula” da Silva’s visit to Argentina, which began on Sunday night.

Politicians from both countries discussed the idea in 2019, but were met with opposition from Brazil’s central bank.

The move is seen as yet another threat to the US dollar’s status as a world currency. Recently, Saudi Arabia revealed it is opening its economic doors to trading in currencies other than the US dollar, while Russia is in the midst of devising a new strategy to conduct settlements with Africa in local currencies as it turns away from the dollar.

Credit Suisse investment strategist Zoltan Pozsar is one of the first authors who wrote about how recent geopolitics have been shifting the world order of money away from a dollar-dominated one, most notably with China’s moves in lobbying oil-exporting countries to allow the biggest importer to settle payments in renminbi.

READ: Zoltan Pozsar: G7 Investors Should Worry About Gold-Backed Renminbi Eclipsing Dollars, Commodity Encumbrance

“Macroeconomic version of getting in a car with a drunk driver”

However, some observers are not holding their breath on how the new currency in South America would contribute to de-dollarization.

In a Twitter thread, Steno Research CEO Andreas Steno Larsen relayed his thoughts on Brazil and Argentina’s reported moves to create a common currency, noting that this is “very clearly not a plausible scenario.”

One of the things Larsen noted is the difference in the two countries’ policy rates, saying “the [central bank] in the new [monetary union] must find a policy level which accommodates both.” Part of the huge 61.25-basis point difference is the headline inflation in Argentina, which potentially means it is “not unlikely that investors start to lower the risk premium on [Argentinian] debt.”

“This potential Lat-Am monetary union is almost like the EUR, except all member countries act like Greece,” he added.

Information for this briefing was found via Reuters. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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