USD: Reserve status of the US currency is threatened

US Presidential candidate Trump yesterday declared that ‘tariff’ was the most beautiful word in the dictionary. He made the threat that if other countries were to attempt to move away from the USD as the world’s dominant reserve currency that he would increase trade tariffs on that country, Rabobank’s FX analyst Jane Foley notes.

USD’s position as the dominant reserve currency to continue slipping

“While the aggregated IMF FX reserve data do not show any evidence that the use of sanctions and tariff in recent years has accelerated the movement away from USDs, it is difficult to ignore the potential impact from changing geopolitical factors. Despite Trump’s threats, in our view, it remains likely that the USD’s position as the dominant reserve currency will continue to slip, though the pace is likely to remain slow.”

“For many countries, particularly those strongly aligned with the US, the risk of trade tariffs could be sufficient to prevent a movement away from using the USD as the dominant invoicing currency. However, the implications for countries which already have a soured geopolitical relationship with the US, the implementation of sanctions could provide a greater incentive to by-pass the USD over time.”

“Domestically produced good, however, will usually be either more expensive or of an inferior quality then the import they replace. Tariffs therefore tend to be inflationary which should lift the USD and for this reason we would expect the USD to be stronger in the early months of a Trump presidency than a Harris one. Over time, however, tariffs can reduce productivity and growth potential.”

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