ITFX Reports on Possible BRICS Currency and Impact on EUR/USD in Forex Market

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The confederation of countries known as BRICS was formed to challenge the economic status of the US dollar and the euro. InvestTechFX explores whether they can successfully combine the economic clout and create a new currency along the lines of the euro, and what implications this will have on Fx traders.

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If the International Monetary Fund’s (IMF) figures are to be believed, the United States is still the world’s number one economy, with a 2010 Gross Domestic Product (GDP) of close to $15 trillion, according to InvestTechFX. Surpassing that mind-boggling figure, however, is the combined 2010 GDP of the European Common Market (ECM). The IMF puts it at just under $17 trillion. InvestTechFX analyzes the effects on the Fx Trading market if and when a new common currency by BRICS is released.

Endless debate can be generated when economists differ on how to adjust the figures for inflation and whether to base them on official exchange rates or use a methodology that accounts for what can be purchased for the equivalent amount between compared currencies, known as Purchasing Power Parity However it is parsed, Fx traders can leave the bean counting to the economists and spend their energy in the more productive pursuit of forecasting future exchange rates between the currency pairs that comprise the Forex currency exchange market .

One development traders should have on their radar is the potential for a new confederation of countries and a new unified currency along the lines of the ECM and the euro. This potential alliance is known by the acronym, BRICS. BRICS stands for Brazil, Russia, India, China and most recently, South Africa. Combined, these five countries encompass one third of total world population, an important factor in economic ranking, since population is a valid resource. They also have a lot of land area, which means abundant natural resources, another critical economic criterion.

From a GDP perspective, three of the countries, China, Brazil and India, respectively represent the world’s second, eighth and 10 largest economies. Russia comes in at number 11. South Africa ranks 28th, but has been undergoing rapid expansion. InvestTech FX reports that these five countries have combined 2010 GDP of $11.3 trillion, close to that of the United States, if it is permissible to consider the almost $3.3 trillion gap a close one.

It is clear, according to InvestTechFX, that BRICS has a way to go to catch the ECM’s nearly $17 trillion, but the main point is that if the BRICS countries can form up and produce a common currency, the longtime status quo of dollar and euro dominance would face a legitimate challenge.

One obvious obstacle is that unlike the euro zone countries, the BRICS countries are dispersed around the world. This geographic scattering should not be lightly regarded. Then, there are the political considerations. It is under scrutiny whether China would be willing to let its currency value flowed freely against other currencies, instead of being artificially devalued as it is now to make Chinese industrial manufacturing exports attractive to other nations. History suggests that this would not be the case. One could reasonably conclude that this confederation would be no more unified than the United Nations. Centuries of nationalistic behavior will not be easy to overcome.

Finally, in what could be considered at least mildly ironic, the first meeting of the foreign ministers of the original four BRICS countries was held in New York. Less ironic, however, is the announcement in 2008 by BRICS nations that a new, diversified, stable and predictable global reserve currency was needed and would be sufficient to cause the dollar to decline in value against other major world currencies.

ITFX , Forex ECN firm, explains that assuming the BRICS nations could successively form a union and issue a currency based on the member countries’ combined GDP, the currency would rank a strong third place in the world. With the growth all the countries, with the exception of the more mature Russian economy, are experiencing, a new currency could soon challenge the United States dollar for second and could easily surpass the euro by the end of the decade, if not sooner.

Imagine the Forex market with the currency called BRICS for now, traded in BRICS/USD or BRICS/EUR pairs. Obviously, the EUR/USD would still be a major pair, but could quite possibly drop from the top traded pair to number three. This could further result in an additional drop in volume as Fx traders would possibly find better liquidity and lower volatility in the new pairs.

For the present moment, there is much that needs to fall in place before such a scenario could unfold, but the same barriers confronted the creation of the euro, of which the outcome is clear in present day.


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