Dec
In September, Donald Trump’s defense of the Dollar position as the world’s dominant reserve currency, stating, “Losing the dollar as the global currency would be like losing a war.” His commitment to this status has led him to warn of imposing 100% tariffs on the BRICS nations—Brazil, Russia, India, China, and South Africa—should they attempt to establish an alternative to the dollar.
BRICS Currency Discussion Still in Early Stages
Although the idea of a BRICS currency is still in its infancy, Trump’s defense of the dollar offers a glimpse into his vision of U.S. economic dominance. He argues that the dollar’s strength has been undermined by the excessive use of financial sanctions, which, according to him, prompt countries to seek alternatives. Trump suggests tariffs as a more flexible and effective foreign policy tool.
The Dollar’s Power and its Global Role
The dollar rose to prominence due to the size and stability of the U.S. economy. Network effects reinforce its widespread use. Countries adopt the dollar because others do, increasing its global dominance. As the world’s reserve currency, the dollar allows the U.S. to borrow at lower interest rates and exert influence.
Sanctions and the Dangers of Overuse
While the U.S. frequently imposes sanctions—currently affecting over 17,000 entities—there is growing concern that the overuse of such measures could diminish the dollar’s effectiveness. Trump criticized this strategy, warning that excessive sanctions “kill your dollar and everything it represents.” He also threatened tariffs against any nation considering abandoning the dollar.
Trump’s Plan to Challenge Federal Budget Control
President-elect Donald Trump’s budget challenge has outlined several strategies to reduce the size of the federal government, including dismantling the Department…
BRICS Nations Increasing Alternative Payment Efforts
Despite the dollar’s continued dominance, countries in the BRICS group are working to reduce their reliance on it. These efforts gained traction after the U.S. and EU froze Russian assets and excluded Russian banks from SWIFT in response to the invasion of Ukraine. Russia and China have turned to alternative payment systems, and there is growing momentum in BRICS to issue debt in their own currencies. Emerging markets are also exploring digital currencies for international transactions.
The Shift Towards Gold and Bitcoin
A growing trend among countries to move away from the dollar has been the increased purchase of gold and the rise of bitcoin. The World Gold Council reports that central banks bought more gold in 2022 than in the previous six years combined. Bitcoin, recently surpassing $100,000, also reflects a shift in the global financial landscape.
Tariffs: A Flexible Alternative to Sanctions
Tariffs are unlikely to replace sanctions for undermining dollar dominance, but they offer greater flexibility. Unlike sanctions, tariffs are not all-or-nothing. They can be adjusted, allowing for more strategic leverage in negotiations. Trump has threatened tariffs on allies like Mexico and Canada over issues like illegal immigration and trade imbalances. Tariffs provide the U.S. with a more adaptable tool to address these concerns.
The Risks of Overusing Tariffs
Despite their flexibility, tariffs also come with risks. Overuse could disrupt global trade, leading to economic harm in the U.S., higher prices, and potential retaliation from other nations. Furthermore, tariffs on major trading partners could reduce the effectiveness of this tool in achieving foreign policy objectives.
The Dollar’s Reserve Status and Trade Deficits
To maintain the dollar’s position as the global reserve currency, the U.S. must run a current-account deficit. The world needs dollar-denominated assets, such as U.S. bonds, to facilitate global trade. Trump wants to reduce the U.S. trade deficit, citing foreign nations undervaluing their currencies. As long as the dollar remains the world’s reserve currency, some level of trade deficit seems inevitable.
