Suddenly, the dollar is back on the slide, on an inkling that Washington is ready to use more than words to reverse its long-standing overvaluation in pursuit of a global trade reset. However, attempting to influence massive currency markets to undergo significant changes could lead to considerable complications. A relatively calm beginning to the year for foreign exchanges, despite significant geopolitical upheavals, led many to believe that the dollar’s sharp decline in early 2025 had come to a halt. The resurgence of U.S. growth and the revitalization of asset markets have solidified its position in the perception of numerous investors. In the past week, Japanese authorities have sought to engage their U.S. counterparts in efforts to stabilize the struggling yen in anticipation of next month’s elections. That reignited speculation that Washington might implement more direct measures to weaken the dollar and potentially reverse years of widespread dollar appreciation. Despite the absence of any formal dollar sales, a “quote check” conducted by U.S. authorities on Friday, typically regarded as a precursor to intervention, resulted in a significant drop in the dollar/yen pairing. Recent Japanese warnings regarding excessive yen weakness reference the joint statement made by Washington and Tokyo last September.

The decline of the dollar is not limited to the yen. South Korea’s won has rebounded, while China’s yuan and Australia’s dollar hit their highest in three years. The transition occurred in Europe on Tuesday, as the euro surged to its highest point in nearly five years, while the Swiss franc reached levels not seen in a decade. The dollar’s index, opens new tab against the most traded currencies – which had its worst first half of any year of the floating exchange era in 2025 – plumbed its weakest ​since early 2022. The discussion revisits a persistent belief that the administration of President Donald Trump aims for a more significant reversal of the dollar’s nearly 50% real appreciation over the decade preceding his return to power, as part of an effort to reduce U.S. trade deficits. A significant number of his top advisers regard tariff increases and a more competitive exchange rate as fundamental components of any revitalization of the American industrial economy. Despite the decline of the dollar last year, the real effective exchange rate index has only decreased by approximately 8% from its peak a year prior, and it remains 35% higher than the levels observed in 2011. While Treasury Secretary Scott Bessent has not provided clear insights into the administration’s stance on the dollar exchange rate, it is possible that his support for Japan regarding the yen was aimed at averting a significant increase in Japanese government bond yields on a global scale. Nevertheless, speculation continues to circulate.

Attention has inevitably shifted back to the pre-election documents authored by Trump adviser — now Federal Reserve Governor — Stephen Miran. These papers introduced the concept of a “Mar-a-Lago Accord,” suggesting a multi-faceted strategy aimed at devaluing the dollar, reminiscent of the 1985 Plaza Accord, during which G5 nations collaborated to sell dollars and mitigate the Reagan-era economic boom. However, while a weaker dollar may currently benefit Japan, it is difficult to understand why Europe or China would agree to a sudden increase in their own currencies—particularly in light of the contentious trade and political relations with the Trump administration.
Sending any such signal to global currency markets, which turn over almost $10 trillion a day, risks opening a Pandora’s box of other potential problems. The primary worry for Washington regarding the potential for a dollar devaluation in an election year is the implications for the stability of substantial net foreign ownership of U.S. assets, which exceeded $27 trillion and continues to grow as of late last year. The potential for unhedged U.S. stocks and bonds to experience a 10-20% decline in value due to dollar fluctuations could significantly disrupt the current investment imbalance, which has resulted in a U.S. liability to the global economy of approximately 90% of GDP. Japanese investors represent the largest group of foreign holders of U.S. Treasuries, while European investors possess $8 trillion in U.S. stocks and bonds.

Moreover, any abrupt and significant decline in the dollar would add complexity for Federal Reserve policymakers, who are already attentive to inflation from tariffs on imports and have indicated a prolonged pause in rate reductions despite external political pressures. That implies to numerous observers that Washington might circumvent this. Treasury Secretary Bessent possesses a deep understanding of the complex dynamics and inherent tensions involved in efforts to substantially lower the dollar, particularly concerning U.S. bond markets, inflation, and the ongoing ‘sell US’ market narrative,” noted Tim Duy. Even if the suspicions surrounding the “Mar-a-Lago Accord” are considered fanciful, there are those who anticipate a resumption of the anti-consensus dollar slide regardless. Stephen Jen believes the market is entering a second phase of a structural dollar correction. He suggests this phase could align with strong growth and stock markets while remaining in line with Washington’s assertive trade policies. In 2025, the dollar underwent approximately one-third of its structural correction, based on my estimation,” Jen noted. The forthcoming third is expected to primarily target Asia, and the euro/dollar may increase in correlation. However, managing the current dollar weakness, robust growth, significant debt levels, and Federal Reserve pressures, all while holding the largest long position in U.S. assets ever, could prove challenging without causing widespread market disruptions or severe volatility. In light of the heightened political and geopolitical tensions, the situation appears to be increasingly complex. The remarkable increase in gold prices over the past year appears more understandable when viewed through this lens.