Trump's BRICS Tariff Threat

Incoming President-elect Donald Trump issued a new tariff threat over the weekend, which this time was levelled against countries seeking to find US dollar alternatives. His last administration saw most of the anti-trade rhetoric and tariffs directed at China, but this time around, it seems to be most of the world. Mr Trump said that “the idea that BRICS nations are trying to move away from the dollar while we stand by and watch is over”. BRICS countries comprise Brazil, Russia, India, China, South Africa – but his comments also included Egypt, Ethiopia, Iran, and the United Arab Emirates. Collectively, these countries account for well over half the global population.

Trump emphasised that “we require a commitment from these countries that they will neither create a new BRICS Currency, nor back any other currency to replace the mighty US dollar or, they will face 100% tariffs and should expect to say goodbye to selling into the wonderful US Economy.”

Trump’s stance on this issue could actually backfire – and I think this points to the US dollar not being stronger on Monday. This is not good policy, it will only exacerbate a move away from the greenback in my view.

There is nothing to stop the rest of the world diversifying from holding dollars and moving into other assets such as gold. The comments also places a spotlight on the dollar and elevates the stature of what many economists still believe is a non-threat to the reserve currency. I thought the stance of Trump lends itself to a lack of confidence in the dollar more than anything.

In October, Russian President Vladimir Putin opened the BRICS summit by calling for an alternative payment system. He said he wasn’t against the greenback but took issue with the weaponisation of it. “We are not refusing, not fighting the dollar, but if they don’t let us work with it, what can we do? We then have to look for other alternatives, which is happening.”

The US dollar index rebounded off support following last week’s steep corrective selloff. The upward dynamic raises scope for a retest of the big resistance level above 107. If broken on the topside, the dollar could extend higher.

Brad Setser, a senior fellow at the Council on Foreign Relations and a former US trade and Treasury official said “trying to force countries to use the dollar makes the use of the US dollar appear to be a favour to the US — when that is not the case now. “Coercing countries to use the greenback could be a long-run threat to the dollar’s global role”.

These comments were also backed up by Deutsche Bank who said in a Monday note that BRICS-focused tariffs would not help the US economy. “It seems to further point to dollar strength being a theme of the new administration as against Trump 1.0 where initially they tried to talk the dollar down.”

Another point is that cutting the US trade deficit — a key policy of Trump also means by definition that foreigners will end up owning fewer US assets. Warning BRICS nations against replacing the US dollar to keep it as the reserve currency suggests also points policy confusion on trade. Maintaining USD dominance is completely inconsistent with stated US trade policies.

Gold stands to be a big beneficiary of Trump’s latest threats on de-dollarisation. Lower trade between the rest of the world and the US will only exacerbate diversification away from the greenback in terms of global reserves. Monday’s initial price action saw gold off nearly 1%, but the uptrend in place since February still remains intact. A breakout above near-term resistance at $2650, would mark a resumption of upward momentum.

Additionally, a trade war with Brazil, India, and China wouldn’t help the US economy. Threatening 100% tariffs on India could hurt the country’s alignment with the US, and higher tariffs on Chinese goods would a shock to the US for many manufactured goods which will be directly passed onto US consumers. The steady shift away from the US dollar globally in terms of central bank reserves is set to continue regardless. Tariff imposition will only accelerate this trend.

I have been wrong on the direction of the US dollar since the Republican sweep in the election last month. However, next year might prove to be a different story for the greenback, especially, if Trump seeks to force the rest of the world to own and trade in dollars. The fact that he is talking about and making it a central issue of the dollar as a reserve currency points to vulnerability.

Carpe Diem!

Angus

Disclosure: Fat Prophets and its affiliates, officers, directors, and employees may hold an interest in the securities or other financial products relating to any company or issuer discussed in this report. Fat Prophet’s disclosure of interest related to Investment Recommendations can be provided upon request to members@fatprophets.com.au.

Chart Source: Thomson Reuters

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Trump’s BRICS Tariff Threat

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