Rabobank: Just What Does A World In Which The Dollar Isn't Reserve Currency Look Like?

By Michael Every of Rabobank

The US has opened two new Section 232 trade actions likely to lead to 25% tariffs on semiconductors and pharma, as already flagged. Obviously, both industries will reel, and Ireland is likely to take a particularly large hit.

President Trump also suggested he may temporarily pause auto parts tariffs for firms shifting production to the US. Expect other industries to ask for the same, and to get the same response: only for a while, and only if you are moving production Stateside.

US Treasury Secretary Bessent has a shortlist of countries for trade deals: Japan, South Korea, Australia, the UK, and India - plus Canada and Mexico. Vietnam and ASEAN are loitering outside the door, being deeply entwined with China’s economy, but mostly running huge trade deficits with it and equally huge surpluses with the US. President Trump is unhappy with Vietnam’s recent state visit from China’s Xi --with calls for a joint stance against “bullying” and 45 deals signed-- but Hanoi boosting its defence budget 30% could mean it buys US F-16s, and more, to narrow the bilateral trade deficit. However, that’s almost certainly not going to be all the US demands. From a statecraft perspective, it will want countries to mirror what it is doing vis-à-vis China, creating a new closed trade/finance/energy/defence loop.

As the US snaffles up those trade partners, plus the Middle East (more on which shortly), who would that leave for Europe to deal with if it didn’t join that gang? Micronesia and those penguins who are facing a 10% US tariff? Naturally, there are reports the EU and US are to start trade negotiations too, even if visiting EU officials now take burner phones for secrecy. Here, Europe again thinks just buying more US LNG will be a solution; but those China terms and conditions are not going to go away. That’s as Chinese social media is showing its consumers how luxury European brands are actually made in China, encouraging them to opt for local alternatives.

In the UK, ‘Senior Labour figures call for review of Chinese investment in UK infrastructure’, and the “Government’s rapprochement with Beijing may risk national security in wake of British Steel crisis, party members say”. Also, household and business refuse may start piling up in the streets outside just Birmingham as unions reject a pay deal ahead of May 1 local elections. So, lots of things that came in nice boxes last week now risk being publicly dumped.  

Former Treasury Secretary Yellen says the Trump admin is undermining the status of the US dollar: the same former Fed Chair who borrowed vast sums at the short end of the yield curve and didn’t refinance US debt cheaply at the long end when she had the chance. Yellen also says onshoring manufacturing jobs is “a pipe dream” and not desirable after presiding over tariffs on China and the CHIPS Act and IRA subsidies aimed at bringing industry and jobs back to the US.

A Financial Times editorial argues Trump has no cards and will lose the trade war, because the pro-globalisation Peterson Institute for International Economics (PIIE) says so. For them, despite being wrong for years, this is still an auto-(pharma & chips)-da-fe, an act of faith requiring public penance and the burning of heretics by the Inquisition. This religious view on trade is the latest in a series of with-us-or-against-us bifurcations – and it’s not helpful to those trying to look at the matrix of potential outcomes and the risks involved either way. After all, what ‘cards’ are the PIIE looking at? Yes, China makes stuff and the US doesn’t. But a larger trading bloc without China can, after a period of adjustment, leave China with vast excess production to absorb.

Likewise, Bloomberg commentary says the US dollar will soften as its reserve currency appeal fades; then provides zero commentary on what the follow-on consequences of not having a global reserve currency are for everyone who still has dollar debt to repay:

The total collapse of the dollar? The total collapse of the dollar-based financial system as everyone defaults on trillions in debts they can’t get the bucks to service through trade? The inflationary debasement of said debts? Global bifurcation into different currency (or commodity), trade, clearing, energy, and defense blocs – within which the dollar may remain primus inter pares at gunpoint despite a narrower trade deficit?

After all, the US can use its legacy financialized weakness as a strength if it opts to. Bessent just stated the White House is thinking about who replaces Powell at the Fed next year – and in an age of economic statecraft it’ll surely be someone who understands the power of dollar swap lines (see "The "Nuclear" Button For The Dollar: The Fed's Swap Lines".)

That’s as the Japanese 30-year yield is just shy of its highest level since early 2004 and not far from its highest ever going back to 2000. How will deeply indebted Japan do: more rate hikes? Equally, how will the Eurozone cope with the flip side of EUR being the new ‘global reserve shmurrency’: trade deficits, deindustrialisation, and polarisation, not unity and remilitarisation? So much is unclear on so many fronts: market volatility reflects this rather than masking it.

The RBNZ just attacked the mainstream media for its op-eds on how it operates(!), while separately announcing a new set of coincident forecasting inputs similar to the Atlanta Fed’s GDPNow, neither of which have any idea about what is going to happen next as tariffs hit.

In the hit-hard power sphere, Trump refused a Ukrainian offer to buy $50bn of US arms, saying of President Zelenskyy: “He's always looking to purchase missiles. Listen, when you start a war, you gotta know you can win a war. You don't start a war against somebody that's 20 times your size and then hope that people give you some missiles." Clearly, hopes for a ‘peace’ deal and an inverse Nixon —Noxin— linger there.

US nuclear talks with Iran are also set to continue in Oman, not Rome, with threats of attack if no deal is struck; as a parallel US nuclear fuel processing agreement with the Saudis looms - “They are allowed to process uranium just like you. So, you both better behave!” That’s a very high risk, high reward statecraft gamble. Moreover, Arab press reports have it that, with Saudi help, 80,000 troops are massing in Yemen in preparation for a move on Houthi-held territory. As noted, this can all be taken as a sign that the Saudis and the UAE are in the US camp having seen neither China nor Russia can project serious power into the region.

Meanwhile, Australia’s federal election shows how little some Western democracies grasp about our shifting tectonic plates. Aussie media says both major parties’ policies will push up house prices by another 15%: clearly, making something more affordable can never mean its price going down, and Aussie GDP is ‘for’ even higher asset prices. Which is what the PIIE would be happy with the US going back to.

But it won’t. The US is now into an auto-da-fe of another kind and globalisation is on the pyre, and perhaps Wall Street with it until it reflects what’s happening on Main Street.

So, volatility now: but there is another world to come. Are your deeds preparing you for it?