As the exuberant Trump White House has been mugged by realities, US dollar is plunging to record lows.

What a difference a year makes! Last November, US dollar hit its 13-year high. According to the US Dollar Index, which measures the currency against a basket of six other major currencies, the greenback soared to a peak of 103. Today, US dollar is struggling around less than 93.

Where is the dollar going?

In the fourth quarter of 2016, when the US dollar still seemed near-invisible, it was driven by the triumphant post-election exuberance and the associated bond yields (and the Fed’s anticipated rate hike), and expectations of Trump’s fiscal expansion (infrastructure stimulus).

Yet, already during the transition, the effort of the US intelligence communities to subdue Trump’s Russia policy began to erode faith in a strong US dollar.

While the Fed had to limit rate hikes and prolong the pause between them, Trump’s fiscal ambitions became constrained by the Mueller Russia investigation. The White House is divided, and so is the Republican House and Senate.

Since December 2016, US dollar has failed to appreciate, despite three hikes by the Federal Reserve. Meanwhile, US consumer prices have plunged from 2.6 percent in January to 1.6 percent today.

Neither Trump nor the US explains everything about the dollar’s fall. The Dollar Index is sensitive to the fluctuations of its largest constituent currencies, particularly the euro (58 percent weight). Some dollar losses could be attributed to the euro’s strengthening, which began with Macron’s election triumph in France that eased concerns about the EU break-up. And as the European Central Bank (ECB) gave an upbeat EU growth and inflation outlook, euro’s rise continued.

Longer-term erosion

In the coming months, US dollar could recover if the White House can get its act together and the Republican lawmakers come up with some legislative success — and if the Fed can execute new hikes without adverse effects.

In reality, risks continue to prevail. Trump has already alienated his European NATO partners by declaring US steel imports a “national security issue,” which will cause economic damage to Germany, Canada and other major steel importers in America.

If trade friction will spread from steel to aluminum, semiconductors and other areas, world trade is likely to take a new hit, as US “trade defenses” will unleash waves of retaliation from Europe to Asia.

In turn, Washington’s Russia sanctions has already resulted in Russian retaliation. For months, EU leaders have warned Washington about such sanctions.

In this odd status quo, it is easy to be distracted by short-term fluctuations. Yet, if one takes a perspective of three-to-four decades, the evolution of the US dollar seems continuous.

Since the 1970s and the eclipse of the gold standard, three periods of dollar surges have been followed by associated periods of decline.

Despite the continued international strength of the US dollar, each of these periods reflects a steady relative erosion of the dollar, from its all-time high of 165 in 1985 to barely 120 in the early 2000s and to 103 last fall.

In the coming months, US dollar could still prove resilient, except for uncertainty and volatility. In the longer-term, US dollar’s recent decline is consistent with its long-standing relative erosion.

The author is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).