In financial markets, some call it "devaluation trading." Others refer to it as selling, hedging, or even a "quiet" withdrawal from U.S. assets. Whatever the terminology, from Tokyo to New York, foreign exchange traders swarmed back into the market last week, triggering a wave of selling that drove the dollar to its steepest decline since Donald Trump ignited a trade war in April of last year. At the core remains Trump. During his second term, the Bloomberg Dollar Spot Index has slumped nearly 12%, falling to its lowest level since 2022. Trump's new tariff threats, attempts to pressure the Federal Reserve into cutting interest rates, assertions of dominance in the Western Hemisphere, and willingness to confront European allies over pushing for control of Greenland have prompted many investors to reduce their dollar exposure. Domestic political polarization and rising fiscal risks have similarly failed to improve sentiment. Others have begun repurchasing "insurance" against a further decline in the dollar. A steeper drop would drag down the value of their holdings in U.S. stocks and bonds, and this hedging activity, in turn, adds pressure on the dollar. Simultaneously, the market harbors a lingering suspicion (which surfaced publicly this week): despite U.S. officials verbally emphasizing a strong dollar policy, the current administration desires (or at least will not prevent) a weaker dollar, as it makes American products cheaper overseas. All of this is gradually leading financial markets to a conclusion: the current U.S. President's adherence to an "America First," zero-sum worldview, and his clear break with the post-World War II economic order, are introducing new risks for overseas investors, who have consistently bought U.S. assets for years, including purchasing trillions of dollars in U.S. Treasury bonds that fund the U.S. government's heavy debt burden. The dollar is "following the path of least resistance — weaker," said Padhraic Garvey, Head of Americas Research at ING in New York. "It's an unstated preference of this administration, but not too weak, too fast, and they don't want the dollar to fall to disconcerting levels." Although the dollar continued to fall this month, it found some support on Friday after Trump nominated Kevin Warsh for Federal Reserve Chair. The market perceives Warsh as less likely to implement significant rate cuts compared to other potential successors to Jerome Powell. Some also believe that upcoming economic data in the next few days could provide support for the dollar. The dollar may still post its worst monthly performance since last August. Robin Brooks, a senior fellow at the Brookings Institution, noted that market expectations for rate cuts even with Warsh joining the Fed limit the dollar's appreciation potential. Brooks wrote earlier this week that the dollar "still has significant downside." Since Trump's return to the White House, speculation has circulated multiple times that his erratic policy shifts would undermine confidence in U.S. assets, but these concerns have often proven overstated. In the first half of 2025, the dollar recorded its largest drop since the early 1970s; however, after Trump walked back the most aggressive tariff measures, U.S. tech stocks continued to rally, and the economy showed surprising resilience, the dollar largely stabilized for the remainder of that year. Other factors also contribute to the recent dollar weakness. Even if the Fed pauses rate cuts this week, the market still expects further rate reductions later this year, prompting investors to shift cash to countries with higher interest rates. Overseas growth is rebounding. Japanese authorities have also signaled their willingness to prevent further yen depreciation. But there is little doubt: Trump's unpredictability is reigniting investor interest in defensive diversification and reducing reliance on the U.S., sowing the seeds for a potentially deeper dollar decline. As the dollar weakened this week, Stephen Jen, co-founder of Eurizon SLJ Capital in London and creator of a widely watched dollar model, warned clients that a "structural dollar correction" might be imminent, for which "many may be unprepared." In Zurich, Carsten Menke of Julius Baer pointed out that with gold again challenging new highs (before subsequently retreating), currency devaluation trading has once again kicked into full gear. Pramol Dhawan, a portfolio manager at Pimco, stated that a falling dollar could prompt investors outside the U.S. to reduce their purchases of U.S. Treasuries and invest domestically instead. Overseas stock markets have recently outperformed the U.S.: a MSCI index of non-U.S. markets rose nearly 30% last year, almost double the gain of the S&P 500 index. "This is not noise, but a change in the regime," Dhawan wrote in a LinkedIn post. "The era of automatic dollar accumulation is over." The current dollar decline began early last week when Trump threatened tariffs on European allies if they did not accept his demand for Denmark to cede control of Greenland to the U.S., triggering a stock sell-off. Even after he subsequently stepped back, the dollar's slide continued. Last Friday, the dollar's decline intensified further: traders cited the New York Fed's focus on yen levels, sparking discussions about potential coordinated market intervention to push the yen higher against the dollar. On Tuesday, Trump "added fuel to the fire," telling reporters the current dollar level was "fine" and good for business, seemingly暗示ing he wasn't bothered by the dollar's weakness. Treasury Secretary Scott Bessent attempted to "cool down" Trump's remarks on Wednesday. In an interview with CNBC, he stated that the administration still prefers a strong dollar and that the U.S. was not intervening to support the yen. These comments helped halt the dollar's four-day losing streak. Speaking to reporters in Iowa, Trump said he didn't believe the dollar had fallen too much. Given the dollar's significant strength in 2022 — when the Fed aggressively raised rates — some analysts believe the dollar was overvalued and due for a correction. Not everyone views the recent decline as alarming or indicative of a troubling retreat from U.S. assets. The dollar also fell during Trump's first year in office (2017), but later recovered its losses. Neil Dutta, Head of Economic Research at Renaissance Macro Research, believes the dollar's drop is primarily driven by "a shift in global risk appetite," rather than a "fundamental reassessment of the U.S. economic outlook." A true "sell America" trade, he said, would manifest as weakening economic demand expectations, weighing on both the dollar and U.S. stocks. "But the current data looks more like normalization: the extreme safe-haven premium the dollar enjoyed during the period of greatest uncertainty is being unwound as conditions improve." Trump's desire for a weaker currency might not be entirely without merit, especially with the midterm elections approaching in November. While dollar weakness could fuel inflation and exacerbate cost-of-living pressures in the U.S., it could also boost exports and overall economic growth. From Trump's perspective, other countries have for decades employed unfair currency practices, leading to massive U.S. trade deficits and the loss of many manufacturing jobs. The U.S. Treasury's latest foreign exchange policy report emphasized that exchange rate misalignments can create unfair competitive advantages and hinder a rapid U.S. economic recovery. Currently, the dollar's weakness is transmitting to other markets. Amid this shift in sentiment away from the U.S., emerging markets have clearly benefited. An emerging-market stock index rose over 9% in January, on track for its best start to a year since 2012. Most emerging market currencies gained against the dollar, with the Brazilian real and South African rand each rising about 4%. Simultaneously, there is substantial evidence that investors are preparing for a trend of further dollar weakness. This week, premiums on short-term options that profit from a weaker dollar surged to their highest level since Bloomberg began compiling the data in 2011, and investors are pessimistic about the dollar's prospects over the next 12 months. Meanwhile, the price of gold — another store of value — has surged over the past year, despite a plunge this week. "To some extent, this is the dollar losing some of its safe-haven halo," said Kathy Jones, Chief Fixed Income Strategist at the Schwab Center for Financial Research. "The kind of 'dollar disaster' many talk about doesn't exist because there's no real substitute for the dollar and U.S. Treasuries in the global financial system. But this does look like a gradual transition to a 'less dollar-centric world.'" The risks for the U.S. are also clear. With a budget gap of approximately $1.8 trillion, the government remains reliant on continued bond purchases by overseas investors. Should they lose confidence, the U.S. might have to pay higher interest rates to attract buyers, which would ripple through the economy and undermine Trump's goal of lowering borrowing costs. Damien Loh, Chief Investment Officer at Ericsenz Capital, stated that Bessent's emphasis on a strong dollar following Trump's comments reflects a concern: the policy of broad dollar weakness initially advocated by Trump could become self-reinforcing and ultimately spiral out of control. Therefore, Trump might also be cautious to avoid actions that further weaken market confidence in the U.S. Last April, his tariff measures pushed the U.S. Treasury market into its deepest slump in over two decades, after which he suspended the implementation of some policies. He also did not escalate the trade war with China further and toned down rhetoric on Greenland after meeting with European leaders. Speculation last year about potentially disruptive moves — such as pressuring foreign creditors to restructure U.S. debt — also did not materialize. The choice of Warsh to lead the Fed might even help the dollar, if he maintains his historical inflation-hawk image. Robert Kaplan, a former Fed official and current Vice Chairman at Goldman Sachs Group, suggested that U.S. government debt — now totaling nearly $39 trillion — could ultimately act as a constraint on the administration. "When you have that much debt, I think the importance of currency stability might outweigh exports," Kaplan said. "The U.S. would want a stable dollar and would want to see stability."