Dollar: What to expect with Donald Trump’s return to the White House ?

Expectations involving the Economics Politics for Trump’s 2nd term.

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President Trump Returns from New Jersey - Google Images

Most economists are betting on a strong dollar in 2025. The Central Bank's most recent Focus bulletin, which brings together estimates from dozens of financial institutions for a series of macroeconomic indicators, points to a dollar at R$6 by the end of the year.

The American currency crossed this level in November last year, a few days after the American election, and practically never came back.

One of the reasons is the expectation surrounding the economic policy of Donald Trump's second term as President of the United States.

To understand exactly how the Republican's return will impact the dollar, it is necessary to wait for the formal announcement of the economic measures, observe the effects they will produce in practice and the reaction of the affected countries.

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The agenda he sold in the campaign and recent signals given by him and his team, however, have solidified the idea that the scenario is one of a strengthened dollar

One of the measures pointed out by economists with the greatest potential in this regard are the tariffs that Trump promised to impose on practically all products that the United States imports, especially Chinese ones.

They did not come in a flood right after the inauguration this Monday (20/1), as some experts feared, which may signal greater gradualism and help explain why, on Wednesday (22/1), the dollar closed the day quoted below the psychological limit of R$6, at R$5.94, the lowest level since November 27th.

Instead, Trump signed an executive order that requires federal government agencies to conduct a broad review of American trade policy, looking for unfair trade practices by U.S. partners.

The reports should start reaching the president's desk on April 1st and could inform his tariff agenda in this second term.

On Monday, he told reporters he was considering taxing Mexico and Canada 25% on February 1 because those countries, he said, had been allowing "massive numbers of people to come in and fentanyl to come in" across their borders with the US.

The following day, he threatened to impose 10% tariffs on China, also from February 1st, in retaliation for the fentanyl that was being sent from the country to Mexico and Canada.

He also declared that he "could" impose a universal tariff on all imports entering the country, arguing that "essentially all countries take advantage of the US."

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Dollar falls sharply and closes at R$5.94, with Trump's 'tariff' on the radar

Ripple effect

The impact of tariff protectionism on the dollar occurs due to a chain movement.

Initially, the increase in tariffs tends to be passed on at least in part by companies to consumers, raising the general level of prices.

Faced with higher inflation, the Federal Reserve (FED), the American Central Bank, comes into play, raising interest rates in an attempt to contain the upward trend in prices.

The increase in interest rates, in turn, in addition to cooling economic activity, also increases the return on American bonds, which leads investors to leave markets considered less safe, such as Brazil, and migrate to the USA, in a movement that strengthens the dollar.

In a study published in October 2024, The Budget Lab, a research center at Yale University focused on analyzing public policies that impact the economy, calculated that inflation could rise by anywhere between 1.4% and 5.1% , taking into account different scenarios.

For example: a broad tariff of 10% for all products that Americans import, as Trump has already suggested, and 60% for Chinese products, in situations with and without retaliation from the affected countries.

"Tariffs cause a level shift in consumer prices in the year they are implemented similar to a one-time shock to inflation," argue economists Kimberly Clausing and Mary Lovely of the Peterson Institute for International Economics think tank, in a report in which detail the potential impact of tariffs on the American consumer.

"The economic burden is similar to a retail sales tax or a value-added tax: an increase in the price paid by consumers. However, tariffs are a more distortive consumption tax, as they cause an inefficient reallocation of production , in addition to an increase in consumer prices", they conclude.

One of the economists who has been vocal about warnings regarding the potential inflationary effects of widespread tariff increases has been Larry Summers, who was United States Treasury Secretary during the Bill Clinton administration (1999 - 2001).

"If he fulfills what he promised in the campaign, there will be an inflationary shock significantly greater than what affected the country in 2021", he said, in an interview with CNN, making reference to the covid-19 pandemic.

Trump's viewpoint, however, is that tariffs can be a source of revenue for the government's coffers.

In his inauguration speech, he even mentioned the External Revenue Service, a body that he proposed to be created specifically to collect tariffs, whose collection currently falls to the Customs and Border Protection Service.

The president has also commented that he sees in protectionism a correction mechanism for what he sees as injustices in the way global trade works, associating the deficit that the US has in the trade balance with certain countries with situations in which other nations would be taking advantage of Americans.

This is a worldview that is close to mercantilism, a model that prevailed in Europe before the Industrial Revolution, Luciano Sobral, chief economist at Neo Investimentos, said in an interview with BBC News Brasil shortly before the American elections.

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The opinions divide regarding the impact on Brazil's tariffs

Brazil target of tariffs?

In this sense, experts also emphasize that it is still difficult to predict the impact of the tariffs themselves on Brazil.

On the one hand, it is argued that the country should not be a preferential target for tariffs, because it does not have a free trade agreement with the United States and has a deficit in the trade balance with the country - that is, it buys more products from the Americans than it sells. for them.

On the other hand, Brazil is a member of Brics, a bloc that Trump has threatened with 100% tariffs if they support any initiative to use alternative currencies to the dollar.

He repeated the threat the day after his inauguration: "We will impose a tax of at least 100% on the business they [BRICS countries] do with the US."

There are no plans to adopt a single currency among Brics members, but the bloc's countries have created instruments to carry out commercial transactions in Chinese currency and the Brics bank has been granting loans in alternative currencies to the dollar.

In the first Trump administration, when the Republican put into practice a smaller version of what he appears to be planning to do this time, Brazil was affected by tariffs imposed on steel and aluminum imports.

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Trump signed a series of decrees after his 2nd term inauguration

The dollar exchange rate mosaic

American monetary policy is, of course, not the only factor influencing the price of the dollar. The exchange rate of one currency in relation to another is the result of a combination of several factors, internal and external.

Last year, for example, the Lula government's public spending policy was identified as one of the factors that contributed to the departure of investors from the country and the devaluation of the real.

Also during last year, the outflow of dollars from the country through financial means was a record, US$87.2 billion, the highest value in the Central Bank's historical series that begins in 1982.

Part of the deficit was offset by another balance of payments account that records the country's foreign exchange flow, the commercial account, which had a surplus of US$69.2 billion.

In a report sent to clients this Tuesday (21/1), economists Mauricio Une and Renan Alves, from Rabobank, assess that "the Brazilian real remains at the mercy of global uncertainties".

They highlight the 27.2% depreciation last year, the second largest in a basket of the 24 main emerging currencies, and estimate the price for the end of 2025 at R$5.94.

Source: BBC News Brasil

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