Currency markets that only a few months ago assumed a trade war would lift the US dollar now suspect that a full-scale devaluation may be underway, suggesting few market players have a clear handle yet on the US administration's dollar plans.
Much like the scuppered post-election rally in Wall Street stocks, the dollar has been a major casualty of President Donald Trump's unfolding import tariff plan, partly due to what his Treasury Secretary Scott Bessent likes to call a trade policy of "strategic uncertainty".
It seems to have spooked many overseas investors who have been propping up punchy US asset valuations for years.
But more than three months into the new presidency, the question of what the administration wants to do with the dollar remains fuzzy in most people's eyes.
Mr Trump made it perfectly clear throughout his campaign that higher tariffs would be a central plank of his economic policy, and, in turn, the dollar climbed sharply after he was voted back into the White House in November.
The basic assumption back then was that inflationary tariffs would keep US interest rates elevated while undermining growth and borrowing rates around the world, forcing the dollar higher in the process and limiting the impact of the tariffs, as in 2018.
In a Reuters poll of more than 70 strategists in early January, for example, the majority assumed the greenback would build on the nearly 8% appreciation in the final quarter of the year, with nearly two-thirds assuming it would reach parity with the euro this year.
Even many of Mr Trump's advisers were braced for something similar.
The tariffs that emerged in the six weeks after the inauguration were not that far off what the president had flagged previously. Yet investors acted like they had been bamboozled, and the dollar suddenly fell back sharply.
So much so, that those same FX analysts polled again this week now see the dollar weakening against the euro as far as $1.16 (38 baht) in a year's time -- some 14% from the parity expected only four months ago and the biggest year-ahead monthly forecast upgrade since November 2010.
Mr Trump's domestic agenda and his stinging criticism of the Federal Reserve raised worries about US institutions, jarring overseas investors in both stocks and bonds. Fear of capital flight only made the dollar sink further.
These moves were understandable, given how much capital has flooded US markets in recent decades. Indeed, $14 trillion of overseas money has streamed into US equities since 2012, about half of which came from Europe.
More broadly, the ballooning US Net International Investment Position showed foreign holdings of US securities at some $26 trillion, more than US investments overseas, a rise of $22 trillion over the same 13-year period.
Reflecting that deluge and the related belief in US "exceptionalism", the dollar's real effective exchange rate index skyrocketed by almost 50% since 2011. Even if the face of all the recent jitters, it's only fallen back 5% since January.
If the Trump team wants a weaker dollar and narrower trade deficits, it may simply have to accept the potentially huge financial market cost, as foreign capital exits in parallel. If so, the process is only beginning.
Now jump forward to this past week, and suddenly, all the talk in Asia has been of Washington forcing dollar depreciation across the region as a quid pro quo for bilateral trade deals to head off the reciprocal tariffs due to reappear in July.
Admittedly, that speculation was denied in official circles, and the wild moves in Asian FX markets may have been exaggerated by a series of regional holidays. But with multiple weeks left to go in all these bilateral talks, more questions than answers are stacking up.
Administration officials remain somewhat coy about the dollar. Mr Bessent insists it should remain the leading reserve world currency, but that a "strong dollar" is really about policies that attract investment and confidence.
Those close to the administration have been more frank. Last week, former Trump Trade Representative Robert Lighthizer said: "We pay a high, high price for having an over-valued currency. It helps Wall St and people in the financial services business, but it's very bad for manufacturing."
Mr Lighthizer was asked if a reversal of foreign capital flows was a price worth paying for correcting the deficit and the dollar.
"The notion that we need that investment is not an accurate notion," he responded. "The reality is we have a lot of money in corporate America sitting on the sidelines."
"I'm not an overly weak dollar guy -- but it wouldn't bother me if it were weaker." It looks like he may be getting his wish, with all that may go with that. ©Reuters
Mike Dolan is Reuters Editor-at-Large for Finance & Markets.