Is the sharp drop in the US dollar a "global conspiracy"?

Source: Wall Street News

In the past decade, the return on US assets has attracted global capital inflows. Sovereign funds in Europe, Japan, Asia, and even the money of oil-producing countries in the Middle East have continued to increase their investment in US stocks and US bonds. As funds continue to flow in, the US dollar has also risen. Now this "exceptionalism" has been shattered.

The US dollar has been "falling continuously" recently. On Monday, the US dollar index accelerated its decline, falling more than 1% during the day, and fell below the two important levels of 99 and 98 in succession during the session, for the first time since March 2022.

The "abnormal" weakening of the US dollar, does this mean that the century-long "dollar hegemony" has collapsed?

The market generally believes that the US government's policies are undermining the international status of the US dollar and exacerbating expectations of a depreciation of the dollar; the Trump administration believes that the strength of the US dollar is a burden on the United States, which is causing distortions in the currency market and placing undue burdens on American companies and workers.

Some analysts further pointed out that whether the status of US dollar assets is weakened or lost will be the key to determining Trump's success or failure.

Goldman Sachs said that the US dollar is overvalued by 20%, and tariffs are undermining the core pillars of a strong dollar. This time it is a confrontation between the United States and the world, so it is more similar to "Brexit" than the tariff friction in 2018.

Gareth Berry, a strategist at Macquarie in Singapore, warned that the latest catalyst for the dollar sell-off may be the pressure faced by Powell. But in fact, there is no need to find further excuses for the dollar sell-off. What has happened in the past three months is enough to prove the persistence of the dollar sell-off, and this sell-off may continue for several months.

01 China "stays on its feet" and Japan sends signals: Does the dollar still have room to fall?

In addition to the impact of the US tariff policy, the US dollar is also under other multiple pressures.

The People's Bank of China's announcement showed that the LPR in April remained unchanged for the sixth consecutive month, showing its confidence in the momentum of economic growth, which puts pressure on the US dollar.

According to media reports, Japanese Prime Minister Shigeru Ishiba recently said that he hopes to make the ongoing Japan-US tariff negotiations "a model for negotiations between the United States and other countries" and emphasized that "the result of zero-sum game will not become a model for other countries", implying that an agreement is reached that is beneficial to both countries.

The subtle change in wording, coupled with the characteristics of the yen as a safe-haven currency, may further push up the yen and indirectly suppress the US dollar.

02 Market vs. Trump Administration: Completely Different Interpretations of the US Dollar's Decline

The market's interpretation of the dollar's decline is in sharp contrast to the Trump administration's attitude.

It is reported that analysts and investors generally believe that the United States' changing attitude towards its allies and its trade protectionist policies are shaking the dollar's status as a reserve currency.

Wall Street is concerned that the Trump administration's policies are accelerating the decline of the dollar, which could lead to turmoil in global financial markets.

"The United States has benefited from its reserve currency status for 100 years, and now it has been cancelled in less than 100 days, which is a big deal," said Gregory Peters, co-chief investment officer of PGIM Fixed Income.

"Despite President Trump's concessions on tariffs, the damage to the dollar has been done. The market is reassessing the structural appeal of the dollar as the world's global reserve currency and is undergoing a rapid de-dollarization process," wrote George Saravelos, global head of foreign exchange research at Deutsche Bank, in a report last Friday.

"In sharp contrast to market concerns, many in the Trump administration believe that a strong dollar is a burden on the United States.

This view holds that the dollar's reserve currency status does more harm than good, because excessive strength will hurt the competitiveness of U.S. exporters. Stephen Miran, chairman of the Trump administration's Council of Economic Advisers, made this clear in a speech last week:

"While demand for dollars does keep our borrowing rates low, it also distorts money markets. This process places undue burdens on our businesses and workers, making their products and labor uncompetitive on the global stage."

Whether intentional or not, almost every action taken by the Trump administration in the first three months of its presidency has dealt a heavy blow to the dollar's support level. Last week, the dollar index fell 2.8%, the seventh worst weekly performance in three decades, and the cumulative decline so far this year has reached 8.2%.

03 Is it chaos or strategy?

The fundamental reason why the market and Trump have different views on the dollar is that they observe from different angles.

In the market's view, the dollar, which is usually a safe-haven asset, has abnormally weakened in the face of financial market fluctuations, showing that the dollar's dominance is shaken and is a manifestation of disorder and chaos.

And some analysts believe that for the Trump administration, "chaos itself" is actually a strategy. Trump sees Powell as an obstacle. Under this framework, Federal Reserve Chairman Powell will either be forced to cut interest rates or face the risk of being fired. The resulting market volatility is not collateral damage, but a means to accelerate the "transformation of capital from virtual to real".

Sarah Bianchi, a senior analyst at Wall Street investment bank Evercore ISI, warned:

"What we are really worried about is that while Trump may be able to reach some agreements on tariffs, the problem is that when the United States faces a broader crisis of confidence, even a comprehensive concession on trade may not help."

This means that whether the status of US dollar assets is weakened or lost will be the key to determining Trump's success or failure.

04 Where will the dollar go next?

Looking ahead, there are different views on the outlook for the dollar.

Mark Sobel, the US chairman of OMFIF (a financial think tank) and a former senior Treasury official, believes:

"Although the dollar's dominance will remain unchanged for the foreseeable future because there is no viable alternative, the value of the dollar may continue to fall."

Sobel further pointed out that the trade war is just the latest example of this administration's "contempt for the rest of the world", and "trusted partners and allies" as a key pillar of the dollar's dominance have been forgotten.

Stephen Jen, a long-term foreign exchange strategist and head of Eurizon SLJ Capital, is more pessimistic. Jen believes that the current US dollar is actually overvalued by about 19% against major currencies. If the US recession is so severe that the Federal Reserve is forced to cut interest rates sharply, cyclical, structural and political factors will work together to cause a sharp depreciation of the US dollar: "Various factors are converging, and the US dollar will enter a multi-year correction phase." "For many years, the overvaluation of the US dollar has been a factor in the decline of US competitiveness, and the widening trade deficit and tariffs are a response to this unfavorable reality." Goldman Sachs also said that the current US dollar valuation deviates from fundamentals and is overvalued by 20%. Goldman Sachs also mentioned a key risk in the report. Currently, there are $2.2 trillion of US dollar-related assets in the world that are not hedged by foreign exchange. Once investors decide to withdraw, the impact will be great. Bill Dudley, former president of the Federal Reserve Bank of New York, believes that the US dollar may even strengthen.

According to Dudley, tariffs will weaken the U.S. economy and increase inflation, while the impact on economic growth in other regions may be more significant. This means that other central banks may cut interest rates more aggressively than the Fed, and may cause the currencies of these countries to weaken against the dollar.