The dollar is extending its losses this morning, following reports that the United States and South Korea held talks on Seoul’s foreign exchange policies in early May – a development that may signal a shift in Washington’s focus from trade imbalances to currency concerns. On a trade-weighted basis, the greenback has fallen more than a full percentage point against its peers in the euro area, United Kingdom, and Japan this week, bringing its year-to-date slump to more than 6 percent.

The Korean won leapt higher along with many of its unpegged Asian counterparts after Bloomberg and Reuters cited sources saying that Robert Kaproth, US Assistant Secretary for International Finance, and Choi Ji-young, Korean Deputy Minister for International Affairs met to discuss foreign exchange policies on the sidelines of a conference in Milan earlier in the month. Whether this represents a genuine shift in policy or a routine formality remains unclear, but South Korea is widely believed to have replicated many of the “shadow” currency intervention tactics deployed by China, Taiwan, Thailand, and Singapore since the global financial crisis, runs a significant bilateral trade surplus against the US, and has also presided over a growing current account surplus. There exists a very reasonable case for bundling foreign exchange issues into a trade agreement, and the rally comes after an even bigger move in the Taiwanese dollar a few weeks ago.

The episode is lending weight to a growing conviction that the Trump administration may be pursuing a deliberate “weak dollar” policy as it attempts to reduce trade imbalances. Under this theory, officials could use tariff threats to put pressure on countries to allow their currencies to appreciate – following the ‘Mar A Lago Accord’ model outlined last November in Stephen Miran’s “User’s Guide to Restructuring the Global Trading System” – alleviating structural overvaluation in the dollar, minimising trade deficits, and spurring a recovery in the American industrial sector. Although the administration has issued repeated disavowals, there is some evidence for this: Treasury Secretary Scott Bessent has a strong background in foreign exchange markets, has often spoken of the opportunity to launch a new Bretton Woods agreement, and has alluded to addressing currency issues in a number of appearances.

Scepticism is warranted nonetheless, given that the administration is also pursuing fiscal policy changes that are highly unlikely to result in a reduction in trade deficits. Although the Yale Budget Lab expects tariffs to add roughly $2.7 trillion to government revenues between now and 2035, estimates from the bipartisan Committee for a Responsible Budget suggest that the tax bill currently wending its way through Congress will add $5.3 trillion to US budget deficits over a similar timeframe, meaning that the projections published in March by the Congressional Budget Office could soon be revised upward. This might be stimulative in the short term* — with the government putting more into the economy than it takes out — but would also increase borrowing volumes over time.

This is important because decades of data show that wide fiscal deficits all but guarantee correspondingly wide current account deficits. When government spending persistently outstrips revenue, the excess must be financed through borrowing – typically from domestic savings or foreign capital inflows. But in an economy where private savings** are insufficient to cover the shortfall, the gap is bridged by importing foreign savings, which manifests as a current account deficit.

Outside the currency markets, price action is slowing. There are no major data releases scheduled for today, the Trump administration has not announced major economic policy changes since Sunday evening, and measures of risk appetite are improving. The S&P 500 is close to wiping out the year’s losses, ten-year Treasury yields are almost unchanged, and the VIX volatility index – Wall Street’s “fear gauge” – is holding below the 20 threshold, well below levels indicative of high stress.

Yesterday’s inflation report was consistent with an economy that has not yet felt the impact of tariff increases. Prices rose 2.3 percent in April from a year earlier – less than forecast and the smallest change since February 2021. On a core basis – excluding volatile food and energy costs – year-over-year price growth held at a 2.8 percent rate, matching estimates. Tomorrow’s wholesale inflation numbers are expected to show slumping services categories offsetting a modest rise in import costs, and putting the pieces in place for a relatively tame update to the Federal Reserve’s preferred inflation gauge – the personal consumption expenditures price index – at the end of the month.

Taken in sum, it seems that markets are settling around a new equilibrium – one that could be maintained through the summer months, but which isn’t likely to last beyond the early autumn. Forgive the salesy-sounding words, but we would urge firms to seize this opportunity to recalibrate their hedging programmes ahead of the next round of turbulence.

*Which, all else being equal, should raise US interest rates and widen real rate differentials relative to the world, helping to lift the dollar against its rivals.

**Note that the imbalance depicted in this chart is partly an accounting identity: private savings can be boosted by government outlays.