Wall Street

There was a wonderful moment, about a year ago, when it seemed the U.S. dollar was doomed. Not in a catastrophic sense—not like the Zimbabwean dollar or the Argentine peso. Rather, in a calm, predictable, almost comfortable way: the dollar would gradually lose value. Inflation would steadily erode its purchasing power, like a mouse nibbling away at a piece of cheese. The Federal Reserve, which newly elected President Donald Trump appeared determined to pressure, would keep interest rates low to please the White House. And investors, tired of American financial dominance, would shift their billions into euros, yuan, gold—anything but greenbacks.

The strategy had a sophisticated name: the “debasement trade.” It sounded almost scientific. In reality, it was a simple bet: the dollar would weaken because America no longer wanted a strong dollar. A weaker dollar helps exporters. Trump had long complained about the currency’s strength. Surely he would get his way. Surely the Fed would bend.

The traders who made that bet a year ago earned billions. The U.S. Dollar Index (DXY) fell to its lowest level in eight years. The euro surged to 1.20. The pound climbed to 1.35. American travelers were delighted—their dollars bought more abroad than they had in years. U.S. importers were pleased as well. Exporters complained, but few were listening.

Then something went wrong.

Inflation, which many had written off, came roaring back—not as a visitor, but as the owner of the house. Oil prices soared amid conflict in the Middle East. The U.S. economy, instead of slowing, kept growing: 172,000 jobs were added in May, while unemployment stood at 4.3%. And the Federal Reserve, which Trump had hoped to tame, showed its teeth.

Markets now price in more than a 70% probability...