The US dollar's exchange rate has unexpectedly weakened again, with markets detecting a critical signal: to reshape global trade dynamics and reverse the dollar's long-term overvaluation, the US administration may move beyond rhetoric to concrete action. However, attempting to fundamentally shift the colossal foreign exchange market will likely be a chaotic process.
Despite escalating geopolitical conflicts this year, the forex market began relatively calmly, leading many to believe the dollar's sharp early-2025 decline had subsided. With US economic growth reaccelerating and asset markets regaining vigor, numerous investors also concluded the dollar's downtrend had halted.
Last week, however, Japan's authorities—preparing for next month's elections—attempted to collaborate with the US to support the persistently weak yen, reigniting speculation: the US government might adopt more direct measures to depress the dollar's value, potentially even reversing its multi-year appreciation trend.
Although no official US dollar sales have been confirmed, Friday's exchange rate inquiry by US authorities—often a precursor to intervention—triggered a significant dollar plunge against the yen. Subsequent Japanese warnings over excessive yen weakness also evoked memories of last September's US-Japan joint statement.
The dollar's weakness isn't confined to the yen: the South Korean won rebounded, while the Chinese yuan and Australian dollar hit three-year highs; by Tuesday, the decline spread to European markets, with the euro surging to near five-year peaks and the Swiss franc reaching a decade high.
The US Dollar Index, which posted its worst first-half performance since the floating exchange rate era began in 2025, has now fallen to its lowest level since early 2022.
Market discussion has refocused on a long-standing hypothesis: the Trump administration desires a substantial real depreciation of the dollar, erasing nearly 50% of its gains during the decade preceding his return to the White House, as a key measure to narrow the US trade deficit. Several core Trump advisors view higher tariffs and a more competitive exchange rate as twin pillars for restarting US industrial economy.
Despite last year's downturn, the dollar's real effective exchange rate has only retreated about 8% from its peak a year ago and remains 35% higher than 2011 levels.
US Treasury Secretary Bassant has consistently maintained an ambiguous overall stance on the dollar's value, and her support for Japan's yen stabilization might simply aim to prevent global market volatility from spiking Japanese government bond yields; even so, speculation about potential US intervention continues to intensify.
Market attention inevitably returns to a pre-election document by Trump advisor and current Fed Governor Milan, which mentioned the possibility of a so-called "Mar-a-Lago Accord": a multi-pronged approach to drive dollar depreciation, echoing the 1985 Plaza Accord where the G5 collectively sold dollars, ending the Reagan-era dollar rally.
But even if a weaker dollar aligns with Japan's interests, European nations are unlikely to accept forced significant currency appreciation—especially amid already tense trade and political relations with the Trump administration.
Furthermore, signaling such intervention to the nearly $10 trillion daily global forex market could open a Pandora's box, unleashing a host of other potential problems.
In an election year, the primary concern if the US government attempts to depreciate the dollar is the stability of the vast US asset holdings by foreign investors. By end of last year, overseas holdings of US assets exceeded $27 trillion and continue growing.
Should unhedged US stocks and bonds suffer 10-20% losses from dollar depreciation, this unprecedented investment imbalance could rupture—the US net external debt to other nations already approaches 90% of GDP. Japanese investors are the largest foreign holders of US Treasuries, while European investors hold $8 trillion in US stocks and bonds.
A sudden, sharp dollar decline would also complicate the Federal Reserve's task. Already wary of tariff-induced imported inflation, the Fed has signaled a prolonged pause on rate cuts despite political pressure.
These factors lead many to believe the US government will avoid direct forex intervention.
SGH Macro Advisors economist Tim Duy noted in a report: "Treasury Secretary Bassant understands that any attempt to engineer significant dollar depreciation carries a double-edged nature for US bond markets and inflation, containing inherent contradictions and potentially fueling the current 'sell US assets' sentiment."
Even if "Mar-a-Lago Accord" speculation proves fanciful, some analysts still anticipate renewed dollar declines.
Eurizon SLJ Capital chief economist Stephen Jen believes the dollar is entering the second phase of a structural correction. He argues this correction can coexist with robust US growth and buoyant equities, while aligning with the administration's tough trade stance.
Stephen Jen wrote: "I estimate the 2025 structural dollar correction was only about one-third of what's expected; the next third may primarily target Asian currencies, with EUR/USD potentially rising further."
However, against a backdrop of strong US growth, high debt, Fed policy pressure, and record foreign holdings of US assets, engineering further dollar weakness without triggering broad market turmoil or extreme currency swings presents an exceptionally difficult balancing act.
Achieving this goal becomes even more challenging amid increasingly tense geopolitical and domestic US politics. From this perspective, gold's remarkable price surge over the past year seems hardly surprising.