“Father of the ‘Dollar Smile Curve’: The new cycle of dollar decline has begun, and the market is completely unprepared for Trump’s tacit approval of devaluation.”

Stephen Jen, the originator of the "Dollar Smile Theory," warns that a new cycle of dollar depreciation may have already begun, and the market is completely unprepared for it. The founder of Eurizon SLJ Capital and former Morgan Stanley currency strategist said that the Trump administration is seeking an exchange rate level favorable to U.S. exporters, marking a new stage of dollar weakening.

According to Bloomberg’s report on Wednesday, Trump said on Tuesday that he does not believe the dollar is excessively weak, and this statement triggered the biggest one-day decline in the dollar since the introduction of last year’s tariff policies. The Bloomberg Dollar Index fell as much as 1.2%, dropping to the lowest level in nearly four years. Trump told reporters in Iowa that the recent decline in the dollar is a good thing for American businesses, and this comment caused significant volatility in the foreign exchange market later on Tuesday.

The sharp drop in the dollar pushed the euro and pound to their strongest levels since 2021, while the Swiss franc hit its highest level since 2015. In the Asian market, the Korean won and Malaysian ringgit led the gains. Gold prices soared to near $5,300 per ounce.

Market participants believe Trump’s acceptance of a weaker dollar could be another signal for overseas investors to sell dollars and accelerate their "quiet exit" from U.S. assets. This is a further blow to foreign holders of U.S. assets, following tariff threats, attacks on Fed independence, and unpredictable policy-making.

Analysts Warn: The Market Isn’t Prepared

Stephen Jen pointed out that an entire generation of foreign exchange analysts has become accustomed to a strong dollar and a robust U.S. economy, and they are unable to deal with a scenario where the dollar weakens but the U.S. economy remains strong. “This is very likely just the beginning of the next round of dollar weakness, and many may be completely unprepared for it,” he said.

Anthony Doyle, Chief Investment Strategist at Pinnacle Investment Management, stated that when the person who could have supported the dollar seems unconcerned, people feel the dollar’s supporting strength is waning. "The market is re-examining a question: Is the U.S. asking investors to accept lower standards of stability, thereby requiring a higher risk premium?" he said.

Market Indicators Show Devaluation Concerns Intensify

At least one market indicator suggests that concerns over long-term dollar depreciation are increasing. According to JPMorgan’s index, the dollar risk reversal indicator against major currencies fell on Tuesday to the lowest level since June, indicating growing demand from investors to hedge against dollar weakness in the options market.

Another indicator shows the dollar remains overvalued. Data from the Organization for Economic Cooperation and Development shows that based on the purchasing power parity benchmark, the dollar is overvalued against all G-10 currencies except for the Swiss franc. The indicator shows the yen and euro are especially undervalued, supporting claims that European and Japanese exporters enjoy an unfair advantage.

Diverging Views in the Market

Not everyone believes that Trump’s comments signal a long-term dollar decline. Rodrigo Catril, a currency strategist at National Australia Bank, stated that Trump’s remarks suggest the U.S. government does not oppose the recent dollar drop and mainly wants to see currencies like the renminbi and yen appreciate. "I don’t think the president wants to trigger a generational change for the dollar, but the uncertainty around the dollar’s movement has added another dimension," he said.

Goldman Sachs Vice Chairman Robert Kaplan warned that sustained dollar weakness poses various risks to the U.S. economy. While a weaker dollar indeed boosts exports, the U.S. currently has a debt of $39 trillion and is moving toward over $40 trillion; when the debt is this huge, I think currency stability could be more important than exports," he said in an interview with Bloomberg TV. "I actually think the U.S. wants to see a stable dollar and also a stable economy. They hope to be able to sell long-term government bonds: a stable dollar will be beneficial," he said.

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