'Too many dollars in the world': Economist warns of slow erosion of US currency's dominance

The dollar's position as the world's dominant reserve currency faces a gradual erosion because it is "oversupplied" relative to the size of the US economy, according to Edward Price, a former British economic official and senior non-resident fellow at New York University.

While the dollar would likely maintain its role as a commodities currency and exchange medium for some time, market sentiment could shift sooner than many expect, Price said in an interview with CNBC. 

"There are too many dollars in the world versus the size of the US economy," Price said when asked whether BRICS could form itself in the longer term into a currency union. "That means ultimately that one day - and one day soon - markets will turn around and say, 'Well, okay, what is the dollar worth?' And it might be that the United States is no longer the predominant reserve currency."

Price said BRICS or any other bloc would find it difficult to produce a ready-made replacement for the dollar due to its entrenched global usage. But he predicted a "slow erosion" as other assets become more attractive and the so-called "dollar smile" - investor flight to US assets in times of stress - shrinks.

Turning to BRICS politics, Price dismissed the idea of a homogeneous anti-Western bloc, noting long-standing tensions between India and China, and between China and Russia. However, he warned that blunt US diplomacy, protectionist trade measures, and "insults" in negotiations could push the three closer together.

In recent years, BRICS nations actively discussed creating a common currency to challenge the dominance of the US dollar, with Russia, Brazil, and China pushing hard for an alternative payment system or even a 'BRICS bill.' However, India was notably unenthusiastic, as its leaders repeatedly distanced New Delhi from the proposal. 

External Affairs Minister S Jaishankar and Commerce Minister Piyush Goyal made it clear that the country opposed the idea, stressing the difficulty of sharing monetary policy with China and the economic risks involved. India instead prioritises internationalising the rupee and settling trade in local currencies, rather than pursuing a shared BRICS currency that could curtail its policy autonomy. 

On India's position in the global balance of power, Price stated. "If India plays its cards right, it should become, if not the most powerful, then the most substantial and influential country in the 21st century. If India throws its weight into any future US–China conflict, it will decide the winner," he said.

Price argued that Trump's confrontational trade approach - including a 50% tariff on Indian imports of Russian oil effective August 27 - risks alienating New Delhi and undermining the US Indo-Pacific strategy. "Yes, Donald Trump has upended the Indo-Pacific order - not to the United States' favour," he said, urging Washington to "get on board with India" as it confronts China.