Trump's Capital Tax Would Be Coup De Grace For The Dollar

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Yet Trump 2.0 is rapidly escalating these risks in ways that could backfire badly on the US. Case in point: Trump's crackdown on student visas for China and a steadily expanding number of countries he doesn't like. Few US industries enjoy such a large trade surplus as education.

But Trump's war on capital, on top of his war on trade , would be a deeply ominous development if the US Senate passes the version of the funding bill the House of Representatives has already greenlit.

Emmanuel Cau, Europe equities strategy at Barclays, warns that tax legislation merely becoming law could tarnish the value of dollar assets in the eyes of foreign investors.

“In our view, this is a risk for those companies generating US revenues and domiciled in countries that have enacted Digital Services Taxes or are implementing the OECD's Under Taxed Payment Rule,” Cau explains.

Then there are the Trump tantrums to come. One is his threat to slap 100% tariffs on countries trying to de-dollarize. That's particularly true of BRICS nations - Brazil, Russia, India, China , South Africa - as well as Egypt, Ethiopia, Iran and the United Arab Emirates.

As Trump put it:“We require a commitment from these Countries that they will neither create a new BRICS currency, nor back any other currency to replace the mighty US dollar, they will face 100% tariffs, and should expect to say goodbye to selling into the wonderful US economy.”

Not surprisingly, Trump argues there's“no chance” the BRICS will replace the dollar in global trade and any country that tries to make that happen“should wave goodbye to America.”

Economist Warwick Powell, author of“China, Trust and Digital Supply Chains”, says the globe's high exposure to the dollar makes many nations reluctant to undermine US capital markets

But“these concerns are countered by growing weaponization of the USD and USD assets, as well as threatened moves by the new US administration to erect significant barriers to trade with the US,” Powell says.“The constraint is that foreign holders of the dollar and dollar-denominated ... capital assets would be reluctant to rapidly diminish the exchange value of these holdings.”

Yet if forced due to the US government's punitive economic measures and intensified weaponization of the dollar and associated financial assets, Powell says,“then it is possible for BRICS nations to achieve a successful compensatory transition within a relatively short period of time. This does not imply that such a transition would not be disruptive or cost-free; it simply says, it can be achieved.”

That's why, as economist Marcello Estevao at the Institute of International Finance sees it, the global economy in 2025“stands at a precarious crossroads, heavily shaped by an overarching theme: uncertainty.” From“political decisions to policy implementations, the lack of clarity emanates largely from the new Trump administration. This uncertainty extends far beyond the United States, permeating global markets, trade relations and regulatory frameworks.”

There's still every reason to think Trump will try to fire Powell. As he said at the start of his second term in January:“If the Fed had spent less time on DEI, gender ideology, 'green' energy and fake climate change, inflation would never have been a problem.”

He complained, too, that“because Jay Powell and the Fed failed to stop the problem they created with inflation, I will do it by unleashing American energy production, slashing regulation, rebalancing international trade and reigniting American manufacturing .”

It's clear Trump is doing no such thing. In May, US manufacturing, which Trump's tariffs were supposed to save, contracted for a third consecutive month. The Institute for Supply Management's index slid 0.2 points last month to 48.5, below the 50 level signaling expansion. A gauge of imports, meanwhile, dropped to a 16-year low amid tariff uncertainty.

“An aim of tariffs is to spur a durable rebound in US manufacturing employment,” write Wells Fargo analysts in a note to clients.“However, a meaningful increase in factory jobs doesn't appear likely in the foreseeable future, in our view.”

Weak factory job growth may partly reflect high labor costs, an insufficient bench of skilled workers, slowing population growth and reduced immigration.“Higher prices and policy uncertainty may weigh on firms' ability and willingness to expand payrolls,” the analysts note.

What's really needed, though, is for the Trump administration to vastly increase investments in productivity -increasing industries.