How low can the dollar go?

0:06Pushkin. The US dollar is down in the dumps. It's not crashing, but investors really don't like holding dollars, and it shows. It feels like the currency is taking the strain in markets from all the political disruption. Because that's the thing. It's not really economic news that's doing the damage here. It's the politics, stupid. Selling dollars, or just avoiding them, is the key way big investors are protecting themselves from, let's call it the unorthodox economic policy in the US of A, even while the economy itself is motoring along kind of fine and stocks are at least okay. Today on the show, how low can the dollar go?

0:48This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in rainy London. It's so rainy I might need to build an ark and fill it with animals two by two. And people, it's a Brit takeover today because I'm joined in the studio by my very excellent colleague, Mr Ian Smith, who's taking a brief break from the newsroom. You're normally hammering out stories, Ian. This is like a break for you. They've let me out to talk to you and then I'll be back on. So you've been writing about this recently, I've been writing about this recently.

1:25The dollar's in a funny place, isn't it? Because in a way, a lot of things are pulling in the dollar's direction, right? You've got the economy in the States doing pretty well. The economy in the rest of the world, at least in developed markets, is a bit unimpressive. So why isn't the dollar like shooting up to the sky? Yeah, you had that January jobs number, which was better than some people had feared. So some, as you say, economic resilience there. So that should be supportive of the dollar. You also had some easing to the concerns around Federal Reserve independence. Kevin Walsh, maybe not as bad as some of the other candidates that people had expected in terms of how that might impact on the dollar status.

2:05And yet the dollar has really struggled to do well. And that's because, as you flicked out in your introduction, the market is just so bearish on the dollar. Asset managers hate it. Bearishness against the dollar reaching a record low on a recent survey conducted by Bank of America. You can see that in positioning data. You can see it in the relative cost of options, betting on dollar strength versus weakness. So you have to look a little bit hard to see it, right? Because so the dollar index, which sort of measures what the dollar is doing against a bunch of other big currencies, that had a bad year last year, 2025.

2:41So it fell about 9%. It hasn't really recovered so far in 2026. So the big picture direction of travel for this thing is down. But you've got like even sterling is doing pretty well, clinging on there at$1.35. The euro is doing all right at about sort of$1.17. But it's almost kind of what people are saying about the dollar even more than what they're doing about it that is really kind of downbeat at the moment. Like you say, there's that survey the other day. Bank of America does this thing every month. It talks to a whole bunch of big fund managers around the world about all sorts of different things.

3:19And yeah, as you alluded to, they do not like the dollar one little bit, right? What were they saying? And this was conducted after the nomination of Walsh, right? Which some people thought cleared away some of the negative sentiment or should around the dollar. So I'd say there's three major factors that are pushing the dollar weaker. One is that the US is continuing to cut interest rates, while some other big central banks have either stopped or, in Australia's case, have actually done their first interest rate rise. in a few years. So there's that kind of eroding, that advantage you get from holding dollar assets, that relative interest rate that has been positive, it is starting to shrink.

3:58So there's that kind of eroding carry advantage, as people say, around the dollar. So that's the one that is economic. But then there are these other significant factors that you lay out. So one is this diversification that's going on among global investors away from the US, away from dollar assets. So either choosing, as we've discussed before in this podcast, to hedge more of their dollar exposure, activity which itself pushes the dollar weaker because of the way they do it but also looking to invest more of the kind of fresh money elsewhere so like we've seen inflows into european equities emerging market equities being stronger so you've got that diversification that's point two and then the third of those ongoing worries around u.s institutions so there's this sense that when it comes to the u.s um high debt and wide deficit um and this political pressure on the Fed to continue cutting rates, even into an economy that is actually quite resilient, that the dollar is going to be the victim of this.

4:54If interest rates are being held lower, then they should be perhaps, inflation allowed to run higher, and that the dollar will be the loser from that maker. Yeah. One thing to bear in mind here is that it's not that unusual to have a strong US economy and a weak dollar, because normally what happens is if you have a strong US economy, the rest of the global economy also does pretty well. and for reasons probably too boring to go into, that means that people like asset managers in the States put more money to work elsewhere and that pushes the dollar lower. But what is really interesting here is that some of these normal correlations have broken down.

5:28So you do have a strong US economy, like I say, a kind of bumbling rest of the developed world economy and yet you still don't have the dollar pushing higher. So if some of the economic factors are becoming less important, then that does lead you to isolate the politics as the reason why this is happening. And I've seen like a bunch of banks talking about this recently, you know, and they dress it up all kind of nicey-nicey and talk about, oh, the diminished role of rate differentials. And what they mean by that is it's the politics. People don't like the politics. People don't like the way that the president is mucking around with the Federal Reserve.

6:09You know, that's kind of, that's what they mean. And in private, that's what a lot of people say is it is the politics. And you do also, as you say, you see that coming through in what investors actually do in the rest of the world. So I was chatting the other day to Amundi, the European asset manager, and they were saying to me that when they get new clients now or when they're having conversations with existing clients, they're pushing that conversation of saying, so, you know, you've got a lot of money put to work in the US here. Wouldn't it be nice to spread this money around stock markets in the rest of the world a bit more evenly?

6:45And that's a really difficult conversation because clients are like, well, I measured against a global benchmark and that's very US heavy. And this is a really like it's a huge pain in the ass, frankly, to move away from this benchmark. But when a Monday says to prospective clients, well, why don't you stick to the existing benchmark but sell the dollar and hedge away the dollar risk? Apparently, that is a very open door to be pushing on and pretty much all new mandates that they sign have clients saying, yes, please, please deal with the dollar risk. Yeah, I hear very similar things. So I was speaking to Roger Hallam, who's head of global rates at Vanguard, a massive asset manager.

7:22And I quoted him in the piece the other day saying that investors are looking to hedge more of that U.S. exposure, but also reappraising the level of allocation they have to the U.S. And we just hear this over and over again from asset managers that they're having this from clients. And it might not be selling down for some. It might be just investing new money that they have or money that is maturing from other investments outside of the US. But it's a multi-year effort. So I think that's real. And the only other thing we haven't discussed is that there have also been questions this year over the US longstanding strong dollar policy.

7:55The idea that they support the strength of the dollar over time. That's a tricky one, isn't it? Because actually, so you do have a sort of a note of weakness in the dollar that we've seen this year and moreover last year as well. So it's just added to that decline over the course of 2026, which has only just begun, obviously. These two things are separate, right? The performance of the currency and the policy. Yeah, but so actually the administration and advisors around Trump might be quite happy to see dollar weakness because it's for some time been the worldview of some people who are now around Trump and around the administration that strength in the dollar is a burden.

8:32And that is the thing that's holding back U.S. manufacturing jobs. And what we need is a nice weak currency so that we can export more stuff to the rest of the world. I mean, you'd need a much weaker dollar for that to work. And I'm not even sure it would work even then. Agreed. But I think the fact that you have officials saying that in the second term, and they said it in the first term as well, of Donald Trump, and the fact that when you had some of this dollar weakness a few weeks ago, Donald Trump came out and said it was great. Yes. Then the Treasury Secretary Scott Bassett after that came out to clarify, no, we still have this strong dollar policy.

9:07And the other thing that they were addressing is this rate check that US authorities did on the Japanese yen dollar. So it created a lot of speculation in the market that there was going to be a joint US-Japan intervention that would have weakened the dollar and supported the yen, which had fallen heavily on political concerns. Yeah. So the idea that they would, even though they have this long established strong dollar policy, intervene in a way that would weaken the dollar, combined with all those statements that people have made, made people say, hold on a second. Is there actually a bit of a kind of unspoken policy here for dollar weakness over on top of the economic things we're talking about?

9:45And then they came out to try and clarify and say, that was not our intention and that policy remains. But there is a question mark for investors as to, we know that in many ways they would like a weaker dollar. And things like the rate check they did do on dollar yen fits into maybe a theory that they are comfortable with even more weakness than we've had. Now, the fly in the ointment for those people around the president who want a much weaker dollar, as we've been discussing, we've got quite a healthy U.S. economy and yet, you know, a central bank that's cutting rates and that's what's generating a lot of this dollar weakness.

10:26But freeze frame, this week we had minutes from the latest meeting of the rate setters at the Federal Reserve. And those minutes painted a picture that is not necessarily conducive to lots of additional rate cuts, which would be super awkward and very fun to watch in the coming months. But what was going on there? So in those minutes where you get a summary of the deliberations of the rate setters, it said that several of the Fed governors had considered two way risks to the kind of monetary policy. That's kind of code, right? That's kind of the way that they say. So because central bankers always talk in very kind of yeah, but no, but quite sort of academic terms.

11:12They don't just say this is what we're going to do next. But when they say there is two way risk, what that means is we could cut rates, but we could also raise rates. Because inflation might prove to be more persistent than we had expected. And definitely with that resilient U.S. economy, if they still reduce interest rates, there's a couple of quarter point cuts that are currently priced into the market. There is that concern. If they run the U.S. economy hotter into the midterms, perhaps intentionally to get it as strong as possible and support the administration, inflation could come back.

11:47and so the next move might have to be a hike. And that's something that's definitely, as I say, not in the market expectation right now. But just those remarks have supported the dollar in the past couple of days. So it could be that that makes it more difficult for them to cut rates if you see significant numbers of people at the Fed worrying about inflation. It is going to be really interesting in the next few weeks, isn't it? Because you've got this tussle between a healthy economy and slightly sticky inflation, which all things equal adds up to higher interest rates and a stronger dollar. But then we're really starting to see some of that sort of presidential administration interference into what the Fed does really starting to crystallize.

12:29So just a few days ago, Kevin Hassett, who was one of the contenders to get the Fed top job. He's an advisor, an economic advisor to Donald Trump. and he was criticising a report that came out just the other day from the New York Fed about tariffs. And I think the title of the note from the New York Fed was Who Pays the US Tariffs? You're going to be shocked to hear on this, Ian Smith, that the answer is US companies and consumers. It is not, as Donald Trump seems to think it is, China. And Kevin Hassett was saying this is a terrible report, this is really faulty analysis. So this is like a direct example of interference in, OK, not necessarily the monetary policy, not necessarily the actual interest rate decisions of the Federal Reserve, but all the kind of supporting research that comes along with that organisation.

13:22So, yeah, you've got an administration that wants lower rates. You've got an economy that kind of wants or needs higher rates, potentially. Someone's got to be wrong somewhere. And this is going to be fun to watch from the other side of the Atlantic, at least. Yes, and it's something we talked about in the end of year podcast, right, that this is one of those key scenarios that could play out this year. While the US economy is weak and inflation is subdued, they can continue to cut interest rates. Perhaps there's political pressure, harder to tell. The real difficulty will be if inflation starts to come back and there really isn't an economic case to cut rates, then the rubber really hits the road there, doesn't it, in terms of is there political pressure?

14:00And that intervention that you mentioned by Hassett follows a pattern of them criticising economists and analysts in the private sector also the things they say about the dollar and the US economy. How do you think this plays out over the course of this year? The impression I get from asset managers outside, and again, I say this on this podcast all the time, but people in the States don't care about this stuff. But the rest of the world really cares. It makes such a big difference to how your US stock portfolio performs. But I don't think anyone is expecting an air pocket here. They don't think the dollar is just going to like go down.

14:38You know, this is going to be a long, slow grind lower as that diversification process that you talk about plays through and this hedging process plays out. These things are quite glacial. My hunch is that we'll get to the end of this year and the dollar will be a fair bit weaker than it is today. I mean, how do you think it will play out? I agree with you on the politics of it. And I think there is that diversification trend that is clearly happening mixed with the kind of extra hedging. And that pushes down on the dollar. The question mark I have is over that inflation piece. Because there is quite a lot of expectation for further cuts, if we have a scenario where it becomes quite hard to cut, we have further evidence, such as we had in the minutes, that it's really hard for the central bank to go along with the market and deliver the cuts that the president so wants.

15:27You could see that providing that traditional support for the dollar if we see those interest rate cut expectations become trimmed over the year. But yeah, I think even in that scenario, there still will be the political pressure. And given these kind of more brazen attacks that we're seeing on the Fed, I could see, yeah, that scenario where the response to that from the administration just increases the political risk in a way that's negative for US government bonds and their currency. It could snap. There could be just a moment where the dollar does fall out of bed. Yeah, so I think a showdown of some degree is something that, I mean, we love to see a showdown as journalists, but I do feel like those two things are colliding.

16:10It's hard for both to kind of remain true. Yeah, and if it all goes wrong, we can sit back and low-key laugh at the Americans. We are just going to be back in one second, listeners, with Longshore.

16:35Already it is time for Long Short, where we go long a thing we love or short a thing we hate. Ian, what are you saying? So I've got a slightly more traditional one for you and not like my last kind of picks on butterflies and other matters. I'm going to go long wealth managers. Oh, really? Yes. So as I'm sure listeners will know, they've been caught up in this AI scare trade, sense that disruption from fintechs will allow people to companies to provide financial advice tax planning instantaneously in a way you won't need that traditional in-person relationship. So wealth management stocks have been really clobbered haven't they?

17:12Really hit you know UK example St James's Place down around 17 % this month and so there's that lasting worry in the market around disruption. I tend to think it might be slightly overdone though I think a lot of this, especially for the richer clients, a lot of this business is about going to visit people on their country pad, sitting down with them to talk to them about their estate planning, their investment strategy. I think it's take a lot longer for that to be disrupted by, you know, a whizzy kind of app in a way that other areas of financial services that are maybe more retail, I think it's quicker.

17:49But I think some of the wealth managers, especially that cater to higher net worth, I think it's hard to say that the markets price that right. They price the huge reaction, the potential for the worst case. But it feels like it hasn't come back at all. So it may be a long term buy. So you don't think wealthy old widows in Hampshire are ready to have robots tell them what to do with their inheritance? Yeah. These are people that have been fleeced on fees for years and didn't realise it. And so helps them they're going to be fleeced on fees again. I just think they value, I think this customer base often values different things.

18:26And it's, you know, an in-person discussion of things that are actually quite complicated, leaving aside all the mistakes that AI can make. I just think it doesn't flick overnight, actually. That's a good shout. That's a good shout. I remain short curling. Why is there so much curling? There's team events. There's like round robin events. there's like two man, three man enough curling Just mop your own kitchen, you know, if you really want to get into this But speaking of mopping, what I'm really short of this week is my god, Ian the rain, when will it ever stop raining? This is getting absolutely ridiculous I think it's here to stay, isn't it?

19:07Like, they've had to cancel my park run for like three weeks or something because it's just like a lake like this is not acceptable It's grim, we've had enough, even us Brits Less curling. Curling is very boring. Less rain. There's just too much of it. And more long-term wealth management. Beautiful. I love that. That's unhedged in a nutshell. How did I come on saying that? Listeners, for more searing insights of this type, we will be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Foreheads.

19:47Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

20:23We'll be right back.