The era of a strong, passive dollar designed to attract foreign capital is over. The US now actively manipulates the dollar's value to suit strategic needs, rewarding allies and punishing enemies. The currency has been drafted into foreign policy as a tool of statecraft, moving from a stable 'King' to an active 'General'.

The narrative of a coordinated "Plaza 2.0" style agreement to weaken the US dollar is likely flawed. The US chose to secure investment commitments from countries like Japan and Korea in recent trade deals, rather than pushing for currency appreciation, indicating its true policy priority.

Despite official statements against rapid currency depreciation in Japan and Korea, policymakers likely view a weaker currency as a beneficial stimulus. With negative output gaps and competition from China, the goal is not to reverse the trend but to manage its pace to avoid market disorder and US Treasury scrutiny.

The PBOC allowing the USD/CNY exchange rate to fix below the psychologically important 7.00 level for the first time in three years marks a significant change. In the past, this level was stoutly defended, and the recent "accommodative signal" suggests authorities are more comfortable with a stronger Yuan.

While U.S. fiscal deficits remain high, new tariffs are reducing the trade deficit. This means fewer U.S. dollars are flowing abroad to foreign entities who would typically recycle them into buying U.S. assets like treasuries. This dynamic creates a dollar liquidity crunch, strengthening the dollar.

The US is signaling a major shift from its long-standing 'King Dollar' policy. By being willing to devalue the dollar, it can strategically intervene in currency markets to bolster allies like Japan while simultaneously hurting economic adversaries like China by making US manufacturing more competitive.

Officials at IMF meetings expressed surprise at how little the Trump administration has focused on foreign exchange rates. There is a growing expectation that this could change next year, with a renewed focus on the dollar if the US trade deficit fails to normalize, creating a latent political risk.

The combination of restrictive trade policy, locked-in fiscal spending, and a Federal Reserve prioritizing growth over inflation control creates a durable trend toward a weaker U.S. dollar. This environment also suggests longer-term bond yields will remain elevated.

The U.S. is increasingly using currency and debt markets to smooth out GDP growth and control economic volatility, mirroring China's state-managed approach. This creates a superficially stable economy but centralizes systemic risk in the Treasury market, which serves as the ultimate 'exhaust valve.'