Trump vs. BRICS: A Tariff Gambit and the Future of the Dollar

In the escalating global battle over currency dominance, President-Elect Trump just threatened the nuclear option: a 100% tariff on the BRICS block of nations should they support an alternative currency to the Dollar.

Here are the highlights of what Kremlin spokesman Dmitry Peskov had to say in response:

“More and more countries are switching to the use of national currencies in their trade and foreign economic activities”

“If the U.S. uses force, as they say economic force, to compel countries to use the dollar it will further strengthen the trend of switching to national currencies (in international trade)”

“The dollar is beginning to lose its appeal as a reserve currency for a number of countries.”

So the real question is, if Trump is serious about this threat, could such a move backfire and actually undermine the Dollar?

Well, markets don’t seem to think so. At least, not if you judge by the immediate reaction to this news. Recently the US Dollar Index (DXY) has declined after hitting a level of significant resistance, but today the DXY caught a strong bid following Trump’s tariff threat.

Also contributing to the DXY rally today was political turmoil in France which undermined the value of the Euro. The Euro also has not been done any favors by the destruction of the Nord Stream pipeline and the end of cheap Russian gas supplies. It is important to note that the Dollar’s rally may have as much to do with a lack of confidence in non dollar currencies as it does confidence in the greenback.

Gold & Silver have held up remarkably well considering the rally in the DXY, with both metals only slightly in the red.

The precious metals appear to be consolidating before they resume their upward moves. Both Gold & Silver are sitting at zones of strong support on the upward trendlines of the bull market that kicked off earlier this year.

The reality is that in a world in which threats of economic warfare are perceived as necessary to maintain the Dollar’s world reserve status, hard money assets like Gold & Silver provide a hedge that is more critical than ever before.

What is Trump’s red line?

A question which comes to mind in light of Trump’s tariff threat is: what exactly is the red line here?

As Trump mentioned in his tweet, a BRICS alternative currency would do the trick. However, at this year’s BRICS summit hosted in Russia, Vladimir Putin himself has already told us that the time is not right for such a currency to be created.

But what about other more subtle forms of dedollarization that are ongoing?

Examples abound, but here are just a few:

• Russia’s energy exports are already priced in non-dollar currencies

• The UAE (another new BRICS member) has sold oil to India priced in Rupees, and gas to China priced in Yuan

• The ASEAN block of nations is increasing their use of local currencies for bilateral trade in favor of the US Dollar

• Saudi Arabia is contemplating taking (and may already be accepting) the Renminbi in exchange for oil exports to China

• China’s use of the Renminbi for cross border trade has already eclipsed the Dollar

  

If the broader trend of dedollarization remains unchecked, the fact that an official BRICS currency is not created will be of little importance in the grand scheme of things.

Hopefully Trump’s threat is a bluff, because if a 100% tariff on BRICS nations is imposed, it could prove to be disastrous for the US Consumer. The US imports large amounts of cheap raw materials and manufactured goods from BRICS in exchange for fiat paper currency. A 100% tariff could cause consumer prices to skyrocket in short order.

Combine that with an already bleak picture in the form of surging domestic US debts and deficits, and a trade war aiming to avert dedollarization could achieve exactly the opposite outcome. More incentive for our geopolitical adversaries to reduce dependence on the western financial system, and greatly diminished purchasing power for the US Dollar.

In the mean time, I view any rallies in the strength of the Dollar as opportunities to acquire hard assets at lower prices. Because in the long run, the fact is that all fiat currencies’ days are numbered, and the Dollar will be no exception.

Happy stacking everyone!