It now appears some countries and companies no longer want to be paid in US dollars.
June 17 (King World News) – Peter Boockvar: If there is an inflation stat that would most quickly reflect the price impact from tariffs it would be today’s import price data for May. But, also of importance is to see what the US dollar weakness is doing in terms making imports more expensive.
As the US dollar still can’t get out of its own way and is hovering around the weakest level since March 2022, a pretty interesting Bloomberg News article was out yesterday titled “Many Exporters No Longer Want Dollars, US Bank Executive says.” Now, the article is long on anecdotes with no hard figures but it still reflects what is possibly a game changing moment where foreigners re-access the extent to which they want to own the US dollar (on top of the rethink that is going on globally as to the level of US assets foreigners want to own after piling in over the last bunch of years).
Foreign Companies No Longer Want To Be Paid In US Dollars
The piece says:
“When Paula Comings, the head of currency sales for US Bancorp, talks to US importers, she increasingly hears the same message: Their foreign counterparties no longer want to be paid in dollars. Instead, they ask for settlement in euros, Chinese renminbi, the Mexican peso and the Canadian dollar, looking to limit their exposure to further swings in the greenback.” Comings said, “A lot of clients previously were reluctant because dollars were sacred in the eyes of the supplier. Now the vibe from the overseas vendors seems to be, ‘Just give us our currency.’ “
Here’s an example given, “A lumber company from the Midwest now converts its US cash into euros before paying for hardwood imports from Europe – a change from its previous practice of simply sending dollars. The move was spurred in part by a 2% discount offered by its European supplier for making payments in the single currency.”
A few more, “Another client, a homeware retailer that imports from China, renegotiated its terms with suppliers and plans to settle its next bill in yuan. A third customer, a US food company sourcing equipment from Italy, agreed to pay its dues in the common currency, causing it to receive a more favorable rate on a purchase worth 400,000 euros.”
Finally, a quote from Karl Schamotta, chief market strategist at cross border payments firm Corpay in Toronto:
“The change is difficult to quantify in real time, but in markets from East Asia to Latin America, a growing number of exporters are opting to denominate contracts in euro, yuan, or even local currencies.”
Major global sea change going on as ‘times they are a changin’.
We continue to like and own non dollar assets like international stocks, bonds (local currency), precious metals and other commodities.
I want to chime in again on the tariff/inflation debate as I continue to believe it is just too simplistic to say tariffs are a one time step up in price, therefore it’s not inflationary. Now, there is a great example of a one time step up in price and that was over the years when the Japanese government would raise the value added tax. Note on the chart below that almost each spike was due to that. One time step up in price with no follow through.
Why I think the current tariff strategy can bleed into more than just one time is because of the disruption and shifting of supply chains that will result from it. It creates a lot of friction. Production that is done in China for example is because it’s the best product at the cheapest price and replacing that to the exact extent is tough. Maybe similar quality can be produced elsewhere but not necessarily at the same price and shifting around supply chains in response to the tariff landscape can take a few years with likely higher costs as a result.
Also, we know rents are the biggest piece of CPI (about 30% of headline and 40% of core) and the cost of construction continues to rise with 50% tariffs now on steel, aluminum and tariffs too on lumber and a variety of other imports. We are enjoying the benefit of slowing rents currently because of the flood of supply of completed projects but new building is slowing and rents should resume higher next year and into 2027 as too the cost of buying home for many remains unaffordable. A lasting impact from tariffs, but certainly also a higher cost of financing an influence too.
And whether higher taxes/tariffs are eaten by the consumer or not, they don’t just disappear and someone’s margin is reduced at the end of the day.
I’ll give my back of the envelope calculation again. A 10% blanket tariff on all imports totals about $330b. That compares with the corporate tax receipts of $525b. Add the two together and you have an effective corporate income tax rate of 34% on about $2.5 trillion of pre tax income (the implied figure from 21% rate and collections of $525b). It’s like the 2017 corporate tax cut never happened. I would have preferred lowering it to 15% across the board as a way to encourage the reshoring of US production. Let us be Ireland.
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