In your photo below, the blue line is a vacuum and it connects to that solenoid on the firewall. Your red line would go to a plastic valve on the heater lines.
When you select the “Max” detent on the a/c temperature dial, this solenoid is energized and vacuum is applied to close that valve on the heater lines. The intent is to maximize a/c performance by shutting off flow to the heater core.
My 98 is plumbed a bit differently, that blue line connects to my PCV valve fitting on the driver side. Your vacuum line appears to connect to the EVAP purge solenoid. That draws fuel vapor into the intake from the round canister on the driver side - your last photo.
That seems odd to have the water valve solenoid connected to that. I want to say that it would be an open vent on that port but maybe someone with a 96 or 97 could confirm. My 98 has a different style Evap purge valve.
What vehicle did the new engine come out of? Pickups did not use the valve on the heater lines. On my 98 truck, it does not have the port on the PCV fitting while my Tahoe does.
1998 Truck PCV fitting:
1998 Tahoe PCV fitting:
The red arrow points to the vacuum that connects to the water valve solenoid.
It probably doesn’t really matter as neither would account for low coolant temperature, but if the solenoid is constantly energized then it would impact heater performance. Unplug the solenoid in that case to see if it changes. There’s also a spring-loaded plunger on the water valve at the heater lines. It’s the shaft for the butterflies in the valve. If it pushes up and down with the engine running then the valve is open.
As for the dash gauge, most report it running at about this point with the 190 (or is it 195) degree thermostat:
The intermediate tick marks don’t really correspond to any number (the first half of the gauge is a 110 range while the last half is only 50) so it’s just an approximation…similar to how Ford just wrote NORMAL on their gauges and called it a day.
The gauge sender is on the driver side head. The coolant temperature sensor is right by the thermostat. That is what the computer uses. You’d need a scanner to read the value and, if you have one, would be a good thing to know.
Couple questions-
Did you bleed the radiator?
Are the heater lines hot - too hot to hold more than a second or so?
Does the upper radiator hose ever get comparably hot?