Stephen Jen, the originator of the "Dollar Smile Theory," has issued a warning that a new cycle of dollar depreciation may have already commenced, catching the market off guard. The founder of Eurizon SLJ Capital and former Morgan Stanley currency strategist indicated that the Trump administration is actively seeking exchange rate levels favorable to US exporters, signaling a new phase of dollar devaluation.

According to a report, Trump stated on Tuesday that he does not believe the dollar is excessively weak, a comment that triggered the currency's largest single-day decline since the announcement of last year's tariff policies. The Bloomberg Dollar Spot Index fell by as much as 1.2%, hitting its lowest level in nearly four years. Speaking to reporters in Iowa, Trump remarked that the recent dollar decline is beneficial for American companies, a statement that later caused significant volatility in the foreign exchange market.

The dollar's sharp decline propelled the euro and the British pound to their strongest levels since 2021, while the Swiss franc reached its highest point since 2015. In Asian markets, the South Korean won and the Malaysian ringgit led the gains. Concurrently, the price of gold surged to approximately $5,300 per ounce.

Market participants believe that Trump's acceptance of a weaker dollar could serve as another signal for international investors to sell dollars and accelerate a "quiet exit" from US assets. This development follows previous concerns such as tariff threats, attacks on the Federal Reserve's independence, and unpredictable policymaking, further unsettling overseas holders of American assets.

Stephen Jen pointed out that an entire generation of foreign exchange analysts has become accustomed to a strong dollar and a robust US economy, leaving them ill-equipped to handle a scenario where the dollar weakens while the economy remains strong. "This is likely just the beginning of the dollar's next downturn, and many may be completely unprepared for it," he stated.

Anthony Doyle, Chief Investment Strategist at Pinnacle Investment Management, suggested that when the person who could potentially support the dollar appears indifferent, it creates a perception of diminishing support for the currency. "The market is re-evaluating a critical question: is the US asking investors to accept lower stability standards, thereby demanding a higher risk premium?" he commented.

At least one market indicator suggests growing concerns about a prolonged dollar depreciation. According to a JPMorgan Chase & Co. index, the risk-reversal measure for the dollar against major currencies fell to its lowest level since June on Tuesday, indicating increased investor demand for hedging against dollar weakness in the options market.

Another indicator points to the dollar remaining overvalued. Data from the Organisation for Economic Co-operation and Development (OECD), based on purchasing power parity benchmarks, shows the dollar is overvalued against all G-10 currencies except the Swiss franc. This metric indicates that the Japanese yen and the euro are particularly undervalued, lending support to arguments that European and Japanese exporters possess an unfair advantage.

Not everyone interprets Trump's comments as heralding a long-term downtrend for the dollar. Rodrigo Catril, a Foreign Exchange Strategist at National Australia Bank, argued that Trump's remarks indicate the US administration does not oppose the recent dollar decline and is more focused on wanting to see currencies like the Chinese yuan and Japanese yen appreciate. "I don't think the President wants to trigger a generational shift for the dollar, but this adds another layer of uncertainty to its trajectory," he said.

Robert Kaplan, Vice Chairman of Goldman Sachs Group, warned that persistent dollar weakness carries multiple risks for the US economy. "A weaker dollar does indeed boost exports. However, with the US national debt currently at $39 trillion and heading above $40 trillion, when debt is that large, I believe currency stability might be more important than exports," he stated during an interview. "I actually believe the US wants to see a stable dollar and a stable economy. They want to be able to sell long-term Treasury bonds: dollar stability would be beneficial," he added.