The US dollar has been the weakest of the G10 currencies - barring the odd uptick - for about 15 months and has demonstrated that economic strength and interest rate hikes do not necessarily act in support of a currency.
Since the beginning of the year, the dollar index - a measure of the US currency's relative strength against a basket of six of its main rivals - is down 3.02%.
The real tell-tale hint at the source of the dollar's doldrums, however, is that the beginning of its material decline came following the election of Donald Trump to the White House in November 2017. Since its last peak in January 2016, the dollar index has fallen nearly 13% - a long-term correction.
Undoubtedly, there was some initial negative impact on the dollar following the unexpected election of President Trump, but the campaign promises of infrastructure spending and tax reforms that boosted growth and inflation expectations helped lift the dollar to its January 2017 peak of 103.81.
The dollar decline begins
It's difficult to pinpoint one particular event that shook the confidence of dollar bulls.
Certainly, there have been mixed messages over interest rates. Higher interest rates are typical of a growing economy and boost Treasury yields, thus attracting foreign investment and lifting the currency.
During his campaign, Trump criticised the low interest rate environment, but has since welcomed low rates as his business-friendly presidency develops.
US inflation, which the Fed targets at 2%, has remained tame. Annual growth in personal consumption expenditures - the Fed's favoured inflation measure - has averaged just 1.4% in the past year. Meanwhile, headline consumer price inflation (CPI) has only lifted to 2.2% thanks to higher energy prices. Core CPI remains at 1.8%.
Interest rate dilemma
Low inflation has left the Fed with a policy dilemma:
- The central bank could hold off from lifting rates given the low inflation environment. This would help cement economic growth, but could ultimately encourage an inflationary upsurge
- The Fed would rather see some normalisation of monetary conditions so it has policy ammunition for the next downturn. It has embarked on a series of gradual rate increases so as not to spook investors or risk damaging growth
So, while the Fed remains committed to its gradual path of rate increases, it has relayed dovish messages on the balance of risks to inflation and growth. Jerome Powell's first rate meeting as Fed chairman on March 21 continued this stance.
"Powell’s noticeable caution during his conference and statement on how there was no clear indication in data of accelerating inflation, encouraged investors to attack the dollar further," says Lukman Otunuga at FXTM.
While monetary policy has done little to support the dollar, fiscal policy should have helped fill the void.
It is true that the lengthy delays in getting Trump's tax reforms to the Congressional hearings stage disappointed dollar bulls, who had expected much quicker delivery on the campaign promise to cut business levies.
When, in December 2017, the new tax bill entered US law, the reaction from the dollar was muted as economists began to offer a contrary opinion: that the boost to growth from the tax cuts may not be strong enough to overcome the likely damage to the federal budget account.
The twin deficit argument
As Trump's tax cuts reduce the flow of cash coming into government coffers, additional spend on projects aimed at creating more jobs takes money out of the Union's purse.
This leads to shortfalls in the federal budget, while Trump's recent protectionist actions are likely to exacerbate the shortfall in the US current account - the balance of the nation's transactions with the rest of the world.
It's a phenomenon called the "twin deficits", and is stirring much debate among economists.
The budget deficit stood at 3.4% of gross domestic product (GDP) in the fourth quarter of 2017, while the current account deficit was 2.1% of GDP.
This is expected to widen as tax cuts slash state revenues by $1.5tn over the next decade, while February's Budget Act passed a spending spree of $300bn over the next two years.
Claus Vistesen at Pantheon Macroeconomics suggests that Trump's fiscal plans will raise the premium demanded by foreign investors to keep buying US assets.
History tells us, however, that rising twin deficits haven't always led to dollar declines - usually because fast-paced interest rate increases have been applied by the Fed to accommodate fiscal stimulus.
While a faster pace of rate increases cannot be ruled out later in this economic cycle, it seems unlikely given the Fed's current stance.
This uncertainty over the possible economic impact of loose fiscal policy is draining appetite for US Treasuries and keeping the dollar under pressure.
"Global current account imbalances have become all the rage at the beginning of the year, mainly to explain the conundrum of why the major currencies have decoupled from interest rate differentials," says Vistesen.
John Higgins at Capital Economics, says: "While a growing twin deficit is likely to weigh on the dollar, we are not convinced that the currency will fall sharply."
He adds that the dollar is eventually likely to find support as monetary policy tightens further to "counter the inflationary effect of looser fiscal policy".
Chris Iggo at AXA Investment Managers believes the whole "twin deficit" argument comes down to the added layer of uncertainty.
He says: "A twin deficit problem can mean a stronger currency – wider budget gaps lead to higher bond yields and the Fed may end up running tighter policy because of the fiscal boost.
"Of course, it may have the other effect if investors lose confidence in US policy settings on the back of the twin deficit problem."
To the future
The twin deficits aren't going away soon and could provide the backdrop to dollar uncertainty for some time to come.
But the bigger picture includes the current problem of trade wars, and the impact on currencies of tit-for-tat actions in response to US tariffs.
There's also the uncertainty of US diplomacy. Trump has systematically ousted those in his cabinet who have embraced any notion of detente and replaced them with foreign policy hardliners.
The recent thaw in US-Iran relations now looks doomed after the appointment of John Bolton as Trump's National Security Adviser. The appointment of Bolton, who has advocated using military force against both Iran and North Korea, comes just days after talks were mooted between the administrations of Trump and Kim Jong-un.
The outlook for the dollar will remain clouded by benign inflation, monetary and fiscal policy, the rising twin deficits and the geopolitical risk environment.
How the US currency ultimately performs over the next six months is anyone's guess given the very many risk events on the horizon.