The American Dollar, China & BRICS - What to Watch for in 2025
Operating out of Brazil, we are also somehow part of the BRICS. And therefore also a look at China. With a focus on emerging markets, we keep an eye on the USD on a daily basis.
Set up
Constant discussions with clients from North America and Europe give us a very exciting perspective from the viewpoint of developing and emerging markets, as well as the view and impacts in mature markets. Thinking in scenarios - as strategic thinking - is part of virtually every project mission for us. In recent years in particular, we have repeatedly carried out projects for North American and European clients in Latin America - especially in the industrial sectors of the commodity, mechanical engineering and automotive industry.
In the following, I would like to give you a summary of what you can filter out from the numerous and intensive conversations we have had over the past few weeks with clients within our project missions.
Donald Trump has long championed the idea of boosting U.S. exports to bring jobs back to the United States and reduce the nation’s trade deficit. Achieving these goals, however, requires a lower-valued dollar. Yet paradoxically, Trump also supports a strong dollar, firmly opposing any challenge to the dollar’s “exorbitant privilege”—its dominance in global transactions. Can these conflicting objectives coexist?
The Weaker Dollar Paradox
Trump’s ambition for a weaker dollar faces an uphill battle, not least because of his own policies. The tariffs he has tirelessly promoted to reshape global trade are likely to strengthen the dollar in the mid-term rather than weaken it.
Historically, global uncertainty—often stemming from U.S.-driven crises—sparks a paradoxical rush of foreign capital into the United States, driving up the dollar’s value.
If tariffs trigger widespread economic uncertainty, this surge in demand for the dollar could counteract the intended effects of limiting imports and boosting exports.
The Tax Cuts Dilemma
Trump’s sweeping tax cuts, particularly for corporations and the ultra-wealthy, create another obstacle. These policies are likely to attract foreign capital into the United States, further strengthening the dollar.
This inflow widens the gap between domestic savings and investment—a fundamental driver of the U.S. trade deficit.
In essence, while the tariffs and tax cuts may serve short-term political narratives, they undermine Trump’s stated economic objectives.
The Exorbitant Privilege
The dollar’s global dominance, often termed its “exorbitant privilege,” compounds these challenges. During crises, the dollar appreciates as international investors seek a safe haven, exacerbating the trade deficit and creating additional hurdles for domestic employment. If Trump were genuinely committed to reducing the trade deficit, he would need to challenge the dollar’s hegemonic role.
However, such a move would alienate his key allies—banks and financial elites—and mark a seismic shift in U.S. economic policy, one that no president since World War II has dared to contemplate.
A Modern Plaza Accord?
Some speculate that Trump’s tariffs are a strategic gambit—a tool to pressure China and the European Union into accepting a depreciation of their currencies. This approach echoes the 1985 Plaza Accord, where the U.S. successfully coerced Japan and other major economies into appreciating their currencies to reduce America’s trade imbalances. However, such a strategy is unlikely to succeed with China.
Unlike Japan in the 1980s, China is not a subordinate power. It is an economic heavyweight, unbound by U.S. occupation or constitutional constraints. Beijing is highly unlikely to agree to a forced appreciation of the yuan, especially one significant enough to meaningfully impact the U.S. trade deficit.
Trump’s dream of a new Plaza Accord with China is, therefore, little more than wishful thinking.
China’s Strategic Choices
Looking ahead to 2025, the real question lies with China. Will Beijing adopt a wait-and-see approach, allowing U.S. internal contradictions to play out, or will it take bold steps to reshape global economic structures?
One potential move could be the creation of a BRICS-led alternative to the Bretton Woods system, with the yuan at its core and fixed exchange rates among BRICS currencies. Such a system could recycle China’s surpluses within the BRICS sphere, posing a significant threat to the dollar’s dominance.
This decision has yet to be made, but its implications could be profound.
If China chooses to challenge the dollar’s “exorbitant privilege” in this way, it could mark the beginning of a new era in global economic relations.
China Sends Double Signal in Trade Spat with US: Restricting Dollar Access While Boosting Gold Reserves
In this very moment, tensions in the escalating trade conflict between China and the United States have intensified following a significant move by Beijing. The Chinese central bank (PBoC) has reportedly instructed major state-owned banks to curtail their purchases of US dollars and cease dollar acquisitions for their own accounts. Furthermore, these banks are being directed to implement stricter oversight on customer dollar transactions, aiming to curb speculative trading activities.
This directive from the PBoC arrives amidst a backdrop of escalating retaliatory tariffs. Just hours prior (related to Apr. 9, 2025), China increased tariffs on American goods to a staggering 84% in response to the US imposing tariffs of 104% on Chinese products. The United States has since countered with a new threat, as US Treasury Secretary Scott Bessent declared that the delisting of Chinese companies from US stock exchanges is a potential option.
The PBoC's move to restrict dollar access is being interpreted by analysts as a deliberate signal in the ongoing economic battle.
By reducing its demand for US dollars, China is not only diversifying its holdings but also potentially signaling its willingness to utilize its substantial USD reserves and holdings of US government bonds (Treasuries) as leverage in the trade dispute.
This action suggests that China's response to US trade barriers may extend beyond traditional trade measures.
Adding another layer to this complex situation, the PBoC has simultaneously announced that it has no immediate plans for a sharp devaluation of the yuan to offset the impact of US tariffs. This decision indicates that China is currently prioritizing economic stability. However, the combination of dollar restrictions and the commitment to yuan stability could also be seen as a calculated "warning shot" directed at the United States, demonstrating China's capacity and resolve to respond strategically.
The dual strategy of limiting dollar exposure while maintaining yuan stability, coupled with the recent tariff hikes and the US threat of delisting Chinese firms, paints a picture of a trade conflict entering a more volatile phase.
The implications of China's evolving financial strategy and the US response will be closely watched by global markets in the coming days and weeks.
Conclusion
In 2025, the tension between Trump’s economic ambitions and the realities of global finance will remain unresolved. Achieving both a weaker dollar to reduce the trade deficit and a strong dollar to maintain its global hegemony appears implausible. Meanwhile, the world will closely watch China, whose decisions could redefine the balance of power in international finance. Until these questions are answered, the interplay between the American dollar, Donald Trump’s policies, and China’s strategy will be a focal point of global economic dynamics. No doubt, with large impacts on emerging markets.
It is precisely these questions that are currently coming up in our project missions - be it in Brazil or Mexico - be it North American, European or Latin American clients. Former clients are already asking Flashlight projects whether we can join them at short notice as a sparring partner in strategic scenario planning that becomes necessary. —Frank P. Neuhaus
What does your scenario look like? If you see a need, we should arrange a non-binding video call.
If you want to know more about the project missions we have been involved in since mid-2024 in the Mexican automotive industry or the South American commodity industry, just visit our Blog & Newsletter section on our website:
