Trump tariffs can weaken the rand to R21/USD

US President Donald Trump’s planned 10% tariff on all products imported into the US could incite a trade war, which would see the rand reach highs of R21 to the dollar.

Reserve Bank Governor Lesetja Kganyago delivered the Monetary Policy Committee (MPC) statement on Thursday, 30 January.

The MPC voted to cut South Africa’s interest rates by 25 basis points, marking 75 cumulative points of cuts in the currency cycle.

However, the governor said this decision was not unanimous. Four members of the MPC voted to cut rates, while the other two preferred an unchanged stance.

He explained that the committee ultimately agreed that it was possible to reduce the degree of policy restrictiveness.

“However, all members were concerned about the uncertain global outlook,” he said.

Given this challenging global environment, Kganyago said the MPC spent some time reviewing a trade war scenario during its January meeting. 

This featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries.

This came after Trump, shortly following his re-election, expressed intentions to impose a 10% tariff on all products imported into the US as part of his ‘America First’ trade policy.

While he has yet to take action and implement these tariffs since taking office, their future enactment remains uncertain and highly likely.

Kganyago said the scenario the MPC reviewed showed higher inflation and interest rates globally and greater risk aversion in financial markets.

“In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts,” he said.

The MPC’s findings align with the analysis of Nedbank chief economist Nicky Weimar, who said at a recent Nedgroup Investments Summit that Trump’s planned policies will likely strengthen the dollar.

Weimar explained that Trump’s tariff strategy is more likely to harm the global economy than the US itself.

Since his initial presidential campaign, Trump has repeatedly suggested imposing a 10% tariff on all imports into the US.

Weimar pointed out that Trump is particularly concerned about the disparity between China’s export share of global GDP and that of the US. Trump believes tariffs will address this imbalance. 

“If you recall, he imposed tariffs on China and also on the European Union regarding certain so-called strategic industries,” she said.

However, these measures failed to resolve Trump’s concerns during his first presidency, and Weimar believes the outcome is unlikely to change this time around.

“Did the tariffs reduce the US trade deficit with China? Not at all. Did they change the trajectory of the US trade deficit? Not at all. And it’s probably going to fail again.”

She explained that tariffs often have unintended consequences, and in this case, they are likely to strengthen the US dollar.

One reason is that tariffs tend to drive inflation. As inflation rises, US interest rates are unlikely to fall – and could even increase.

“That increases the risk-free interest rate in the market, attracting capital out of other countries into the US. This capital inflow means more demand for dollars, strengthening the currency,” she explained.

Tariffs also boost the dollar by giving US producers a pricing edge over foreign competitors, reinforcing the currency’s strength.

A third factor is Trump’s unpredictability. “Donald Trump, we already know from the first term, is predictable in his unpredictability,” Weimar said.

Market uncertainty increases risk, which tends to drive investors toward safe-haven assets such as gold and the US dollar.

“So, this mix of economic policies will likely result in a stronger US dollar,” Weimar explained.