The rand started the week on the backfoot yesterday trading 0.5% lower to R18.18 against the US dollar, its weakest in two weeks weakened by uncertainty brought by threats of severe tariffs on the BRICS bloc of countries.
US President-elect Donald Trump posted on social media platforms over the weekend that he would impose 100% tariffs on imports from BRICS Member States if these countries pursued establishing their own currency, which would undermine the US dollar as a reserve currency.
Analysts and economists have been very sceptical about the possibility of BRICS nations establishing a common currency due to the variance in the monetary policies of these countries.
They also pointed out that the dominance of the US dollar will not be threatened any time soon as the greenback facilitates 88% of global trade transactions, with commodities also priced in the US dollar.
Andre Cilliers, currency strategist at TreasuryONE, yesterday said while it underscores Trump’s protectionist stance, the threat appeared more symbolic than substantive.
“Even with a potential BRICs+ digital currency, the liquidity, trust, and widespread adoption of the US dollar would remain unparalleled,” Cilliers said.
“A hypothetical BRICs+ currency would need significant trade deficits to create global liquidity, invoking Triffen’s dilemma. Backing the currency with real assets (e.g., oil or gold) may add appeal but would not challenge US dollar hegemony.”
Posting on his social media pages on Saturday, Trump said his administration would require a commitment from BRICS 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.
Nolan Wapenaar, head of fixed income at Anchor Capital, reiterated that the market was beginning to look through Trump’s threats and they expected a relatively minor impact at this stage.
“I expect that markets will wait to see how this plays out once he is back in the Oval office. Just under 60% of global foreign exchange reserves are in US dollars and that is not likely to change soon, so we think this is much noise about a minor issue,” Wapenaar said.
“We also note that if Trump actually implemented all the tariffs he has threatened in the last week alone, he would likely crash the US economy.”
Trump has also threatened to impose 25% tariffs on Mexican and Canadian goods and a further 10% on Chinese products, three of the US’ largest trading partners.
Economists have already said the Trump administration, which officially begins on January 20, will be similar to his previous term and the threat over hefty tariffs defines his Presidency of “policy by tweet”.
Dawie Roodt, director and chief economist of the Efficient Group, said there were two issues that were important in Trump’s threats: one about the payment system and the other about the reserve currency.
Roodt said the US dollar will perhaps be sidestepped when it comes to things like trade as the BRICS countries already have payment systems established and will probably expand it.
“But the real threat to the US dollar is to create another reserve currency. And that just isn't going to happen for a very long time. The US dollar is so dominant in terms of a reserve currency that nobody else is going to topple it. I hope somebody explains to Donald Trump that the payment system is not going to topple the US dollar as the world’s most important reserve currency. So I think perhaps he doesn't really understand this thing about currencies and dominant currencies,” Roodt said.
“If he does implement some sort of tariff against South Africa or other countries in BRICS because we're trying to establish our own payment systems, it will really be very unfortunate and it will be bad for the South African economy, but it will be bad for the average US consumer as well. Perhaps somebody should explain Economics 101 to Donald Trump.”
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