It would be unprecedented if it were to happen, but the same can be said for a lot of things during Trump's presidency. As a reminder, Greenland is a semi-autonomous territory of Denmark and part of the NATO alliance. So if the US tries to pull off something, expect there to be a lot of protest and condemnation especially from Europe.
In trying to understand the potential impact in the major currencies space - the dollar in particular - if the US does try to claim Greenland, it arguably can be broken down into two phases.
The first being the initial reaction to it all. Geopolitical conflict often ties to risk-off sentiment and typically is a positive for the dollar. Safety bids will come in amid the more defensive risk mood and that's also what we saw with the situation in Venezuela.
That being said, I would expect the flows here to be rather short-lived. And perhaps in this event, maybe only for a couple of hours at best. The thing is, markets now have some time to digest the whole thing before it actually happens. And so even when it does, the market flow can quickly move to the next part which is where the macro picture comes into play.
In pulling off such a stunt, Trump risks a major breakdown in global alliance and trust. Not just in terms of politics, but also for the dollar's status as a reserve currency. The collective framework in which the global financial system is built around the dollar will now be threatened as the US becomes an unstable player in world politics - even more so than it already is.
That will likely see many countries accelerate their push to de-dollarise and shifting their reserves elsewhere.
And that means potentially shifting towards the likes of the euro and Chinese yuan. However, the simplest argument remains one that is right in front of us and that has been shining brightly for the last two years. And that is gold once again.
In this instance, I would argue that gold is the ultimate safe haven asset. It's just everything about it.
- Increasing geopolitical conflict ✓
- De-dollarisation picking up ✓
- Higher premium to hold US debt and further weakening in US fiscal position ✓
Circling back to the dollar, just be mindful of the potential spike and release reaction that could follow if we do see the unprecedented happen. Never say never in markets. And never say never when it comes to Trump.
