(Dec 2): Donald Trump’s fresh pressure on countries around the world to stay anchored to a US-dollar-based financial system is a tactic that risks backfiring, market watchers say.

The dollar looks likely to dominate the world economy for the foreseeable future and emerging nations’ idea of setting up their own single currency is “hot air”, said Mark Sobel, a retired 40-year veteran of currency policy who worked at the US Treasury. 

Trump’s latest intervention does though risk undermining the greenback and increasing the likelihood of such pacts by encouraging countries to explore ways to avoid the US currency. Russia responded on Monday with the Kremlin saying the dollar’s appeal is already eroding and that forcing countries to use it would “further strengthen the trend” away from it. 

“It isn’t a good look,” Brad Setser, senior fellow at the Council on Foreign Relations and a former US Treasury official during Barack Obama’s presidency, wrote on. It “indirectly elevates the stature of a non-threat and suggests a lack of confidence in the dollar,” he said.

Trump on the weekend warned the so-called BRICS countries he would require a commitment that they wouldn’t create a new currency as an alternative to using the greenback, and repeated threats to levy a 100% tariff on them if they did. 

While South Africa said on Monday there are no plans to create such a rival, Saturday’s post to his Truth Social network echo comments Trump made in his election campaign and highlight how governments and traders will need to stay alert at all-hours to his use of social media in the next four years.

Any attempt to dethrone the greenback is easier said than done. 

It accounted for about 88% of all trades in the US$7.5 trillion-a-day (RM33.41 trillion) foreign exchange market, based on the latest triennial survey from the Bank for International Settlements published in 2022. 

The size and strength of the US economy is also unparalleled, Treasuries are still one of the safest ways to store money, and the greenback is still the ultimate beneficiary of haven flows.

“The dollar remains dominant for several reasons: the USD is the most liquid currency in the world, trades freely, it is also the lending currency of the world,” said Rodrigo Catril, a strategist at National Australia Bank Ltd in Sydney. 

But he added that if “Trump increases the pressure on BRICS, it may well accelerate a move away from the dollar.”

BRICS members control more than 40% of central bank reserves globally and have discussed ways to reduce reliance on the greenback — including the idea of a single currency for use between them.

In its statement, South Africa’s government said “the discussions within BRICS focus on trading among member countries using their own national currencies.”

“With regards to this specific threat, it doesn’t appear realistic and the probability is low, but serves as a good reminder that President-elect Trump wants to keep the US dollar as a reserve currency and is unlikely to proactively devalue the dollar,” said Cindy Lau, head of fixed income at Avanda Investment Management Pte in Singapore.

“This also reaffirms our thinking that tariffs will be continually used as a threat in his term, to serve his objectives and as a powerful bargaining tool,” she said.

While there’s no immediate threat to the dollar’s supremacy, the long-term outlook is less certain. 

Brazil and China had previously struck deals to settle trade in their local currencies, while India and Malaysia had inked an accord to increase usage of the rupee in cross-border business. Thailand and China’s central banks in May signed a memorandum of understanding to promote bilateral transactions in local currencies, and Trump’s latest comments may actually increase the likelihood of further such agreements.

“From today, anyone outside the US who uses the dollar for transactions will sense this as a yoke that the US is imposing on them,” said Ulrich Leuchtmann, head of foreign-exchange research at Commerzbank AG in Frankfurt. “In the long term, this cannot be a stable state of affairs. Especially since this yoke is likely to be felt all the more oppressively the more selfishly US policy acts in other areas.”

Uploaded by Felyx Teoh