Why the US dollar is set for tariff-driven 'surge', BRICS faces an uphill battle

The BRICS (Brazil, Russia, India, China and South Africa) economic alliance may find itself in a tough spot as the US dollar braces for a potential tariff-fuelled boom.

According to Goldman Sachs, protectionist trade policies — especially under a Trump-led administration — could send the greenback soaring, making it an even more attractive asset for currency traders.

The global investment bank suggests that those who take long positions on the USD could see significant profits as tariffs strengthen the dollar’s appeal.

For BRICS, this development could spell trouble. The bloc has long been working to shield its local currencies from dollar dominance, pushing aggressively for "de-dollarisation".

But if the USD continues its climb, their efforts could be thrown into disarray. The very goal of dethroning the dollar as the world’s primary reserve currency now faces a formidable new challenge.

When the US dollar appreciates, it benefits people who earn in dollars (or who earns in a currency pegged to the US dollar) and send money to their home countries.

Here's why:

However, if the appreciation is due to inflation or high interest rates, the cost of living could rise.

Goldman Sachs warns that escalating trade wars could ultimately play into America’s hands, bolstering the USD while undermining BRICS’ economic strategies.

“Ultimately, not all tariffs are equal when it comes to FX,” wrote strategists Karen Reichgott Fishman and Lexi Kanter in a note.

“But given the unwind of premium in key crosses in recent weeks, we once again think tariff risks look underpriced, making long dollar exposure now look even more attractive.”

Trump’s economic policies, though controversial, could drive inflation yet simultaneously push up US yields — further cementing the dollar’s global stronghold.

With markets already rattled by trade tensions, the BRICS bloc now finds itself in an increasingly precarious position.

Local currencies within BRICS nations have already suffered significant blows against the dollar this year, hitting new lows.

As the threat of fresh tariffs looms, the de-dollarization movement could stall for years, leaving BRICS nations searching for new ways to counter the growing might of the greenback.

The uncertainty stemming from trade tensions and tariffs can lead to increased volatility in global financial markets.

As investors seek safe-haven assets, such as the US dollar, this is expected to lead to its appreciation in the short term. However, prolonged trade conflicts could undermine global economic growth, which might negatively affect the dollar's value in the long run.

On February 12, Jerome Powell, Chairman of the US Federal Reserve reported to lawmakers about the Fed's continuing efforts to tame inflation and how and when to ease borrowing costs in the face of new tariffs, possible tax cuts and other institutional moves by President Donald Trump's second administration.

Powell acknowledged the recent uptick in inflation, noting a rise to a 3 per cent annual rate in January, driven by increases in shelter, food, and gas prices, as per Reuters report.

Despite these inflationary pressures, Powell indicated that the robust economy allows for a cautious approach in monetary policy adjustments.

There are potential downsides to high tariffs. The most obvious one is higher prices for imports.

A University of Chicago study showed that even as high tariffs could lead to a bump in domestic prices (as imported goods become more expensive), this could also lead to inflationary pressure that might prompt concerns about the economic outlook.

This could potentially lead to a depreciation of the dollar.

The extent of this effect, however, would depend on the scale of the tariffs and the ability of domestic producers to meet consumer demand without significant price increases.

In light of the persistent inflationary trends, Chair Powell suggested that high interest rates are likely to persist longer than previously anticipated.

In general, high interest rates make borrowing more expensive for businesses and consumers. This can lead to reduced investment, slower business expansion, and a drop in consumer spending, ultimately slowing economic growth.

There have been discussions among Trump's economic advisers about the possibility of devaluing the US dollar to boost American manufacturing.

While such a strategy could make US exports more competitive, it also carries risks, including increased inflation and potential retaliation from trading partners.

Another study conducted by Brookings showed that aggressive trade policies and attempts to manipulate the dollar's value could lead other countries to question the stability of the US dollar as the world's primary reserve currency.

If major economies seek alternatives, this could reduce demand for the dollar, leading to its depreciation over time.

What’s the long-term fate of the U.S. dollar under Trump’s tariffs?

Well, it’s a bit of a rollercoaster ride.

On one hand, some experts say tariffs could boost the dollar by shrinking trade deficits and making it more valuable.

On the other hand, inflation, potential currency devaluation, and global skepticism about the dollar’s dominance could send it tumbling.

The truth? It’s a wild mix of forces at play, and only time will tell whether the greenback soars or stumbles.