Trump Fires Early Warning Shot at Dollar’s Would-Be Challengers

(Bloomberg) — Donald Trump has jumped straight into action as the defender of dollar power, training some heavy fire on an enemy that barely even exists. 

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The president-elect’s recent salvo against the BRICs group of emerging economies was a signal he’ll move aggressively to protect the greenback’s status as the world’s premier money. Any nation that abandons it can forget about selling anything to the US and find another “sucker” to trade with, Trump said.

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The bellicose approach, many analysts say, is more likely to incentivize workarounds to the dollar system – which haven’t made much headway so far – than to snuff them out. And Trump himself is aware that the currency’s reign isn’t in imminent danger, according to people familiar with his thinking.

The rhetoric, they said, is meant to send a broader message: It’s Trump’s way of bucking a pattern of recent US leaders who appear willing to preside over a gradual decline of American power. 

Trump transition team spokeswoman Anna Kelly declined to comment beyond the president-elect’s Truth Social post. 

It will likely fall to Scott Bessent to figure out how to translate the sentiment into an actual dollar policy. Trump’s choice of Treasury secretary – announced in a press release that cited the need to maintain the dollar’s reserve status — demonstrates how seriously he takes the issue. Bessent has spent the past year studying historic currency accords, and delivering speeches about how the dollar fits into the “grand, global economic re-ordering” that he says is needed. 

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All of this talk marks a distinct shift from the outgoing administration. When it comes to the dollar, President Joe Biden and his Treasury Secretary Janet Yellen have mostly chosen to emphasize how unworried they are. Asked a year ago about the trend among other countries to diversify away from the greenback, Yellen said it’s “something that we simply have to expect.”

People close to him say Trump, by contrast, has decided he doesn’t want to be the president in charge if the historic moment arrives when a country abandons the dollar.

And, as usual with Trump, the nuances are someone else’s problem.

‘Wave Goodbye’

The US dollar has been the anchor of global commerce – and the envy of partners and rivals alike — for eight decades. The world’s thirst for dollars has made it cheaper for Washington to finance a government debt pile that’s reached $28 trillion – and for millions of Americans to take out mortgages, or borrow cash to buy cars and pay college fees.

Dollar rule is deeply entrenched, partly because of the sheer size of the US economy and its consistent willingness to run large trade deficits, sucking in the world’s goods and pumping out greenbacks in return. It would likely take years to change this.

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Even so, a bloc of nations –- like, say, Brazil, Russia, India, China and South Africa, otherwise known as the original BRICS – acting together over time could conceivably mount a challenge. 

What’s more, they might want to. After a decade when America has increasingly relied on punitive economic sanctions and tariffs to achieve its policy goals, swaths of the world are starting to wonder if they’re over-exposed to the dollar. 

That’s what Trump has his eye on. About a week ago, the president-elect fired off a missive on social media.

“The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER,” he declared, threatening a 100% tariff in response and sending emerging-market currencies to a two-week low. “Any Country that tries should wave goodbye to America.”

‘Really Befuddled’

The target is talk among the BRICS nations about developing trade channels that would reduce reliance on the dollar, and hence exposure to US sanctions. Russia – under heavy penalties since it invaded Ukraine in 2022 – has taken the lead. In October, Moscow touted the idea of creating direct links among BRICS central banks, or commercial lenders, to enable more cross-border payments in local currencies.

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There’s been interest in the idea, including from some oil-producing nations. But there’s little sign of a coherent plan, let alone a new rival currency. Even some participants are downplaying the challenge to the dollar: India’s Narendra Modi made it clear that the BRICS project shouldn’t be seen as anti-Western. And China, which has made no secret of wanting its yuan to be a dollar rival, just issued sovereign bonds denominated in the US currency – and was inundated with bids.

“The BRICS currency proposal ranks so low on the financial market risk horizon and probability scale that Trump’s threat of 100% tariffs really befuddled many,” said Selena Ling, chief economist at Oversea-Chinese Banking Corp. Ltd in Singapore.

If some were surprised by Trump’s choice of such a niche topic to Truth about on a Friday afternoon, others are worried by his preferred weapon.

Tariffs could backfire. The dollar became the world’s favorite asset because of the attractiveness of using it. If countries have to be bullied into doing so, it could stir up the kind of geopolitical volatility that drives the search for alternatives. 

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“The idea that you’d use political coercion to bind countries, or bind market actors within countries, to use the currency is not how the dollar ascended to this place in the first place,” said Daniel McDowell, a professor at Syracuse University and author of “Bucking the Buck: US Financial Sanctions and the International Backlash Against the Dollar.”

“If that’s what’s needed to maintain dollar dominance, that shows there’s a real fundamental problem with the economic appeal,” he said.

Such subtleties are beside the point for Trump. What he cares about, say people familiar with his thinking, is making sure Americans continue to enjoy the benefits of dollar power. In his view, wielding the tariff stick gets results – like when Canada’s Justin Trudeau flew to Mar-a-Lago three days after Trump issued a separate threat – and puts the world on notice that the incoming US president is watching the US currency’s status.

‘All That’s Needed’

Another dilemma for Trump is that while he wants a global dollar, he doesn’t want a strong one that shuts US exporters out of world markets. Imposing tariffs, whether on dollar defectors or uncooperative trade partners, would tend to boost the greenback, most economists reckon. The US currency already gained a couple of percentage points against global peers in the month since Trump’s election win. 

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Bessent, if he’s confirmed as Treasury secretary, will be charged with threading all these needles. The hedge fund executive has long been a student of – and participant in –- major shifts on global currency markets. 

Bessent was 29, and working for George Soros, when his research contributed to the $10 billion bet that ultimately helped to break the Bank of England and sank the British pound. Once the prospect of becoming Trump’s Treasury chief came in sight this year, he started reading the work of Japanese currency expert Yoichi Funabashi, who has written extensively on how the 1980s currency pacts called the Plaza and Louvre Accords came together. 

While the dollar is key to much of what Trump seeks to achieve, from trade to American leadership in the world, Bessent has hinted that the real issues lie deeper.

“We should be mindful of the limits of currency adjustments” as a tool to make big structural changes, like shifting the terms of world trade in America’s favor, he said in an October speech.

A spokesperson for Bessent declined to elaborate on his views on currency policy.

For many market-watchers, the best way for Trump and Bessent to maintain the dollar’s hegemonic status will be to avoid anything too disruptive of its enduring and deep-rooted appeal. 

“The depth and liquidity offered by US financial assets make them perennially attractive to global investors,” said Taimur Baig, chief economist at DBS Group Holdings in Singapore. “All that is needed is policy and regulatory stability.”

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