The incredible shrinking dollar

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The US stock market is off to a great start to 2026 and US government bonds are also pretty well behaved. So all is well in the world. Peace and harmony reign. Everything is awesome in global markets. Um, you know, kinda. The problem here for pretty much everyone is the dollar. It's taken a decent hit in the opening weeks of this year, and that munches into the returns that investors around the world can get out of US assets.

Plus there's some weird stuff going on with the Japanese yen. If you're confused, I don't blame you, but fear not, for today on the show we're going to unpack what's going on and why it's. This is on Hedge, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin and Markets columnist at FT Towers in London, which has a tiny tiny hint of spring in

air and I'm joined through the magic of the internet by the big man Robert Armstrong off of the unhedged newsletter in New York City. There's not a tiny tiny hint of spring in the air in New York City. There is a tiny tiny hint of I'm about to freeze to death in New York City. So you're still in your snow boots? I am indeed, and my long undies.

Please. It's a family show. Before we get going, we discussed briefly the Melania movie the other day. We did. And um and and it sounds, I've gotta say, epic. One review that I saw the other day said Even if they showed it on a plane, people would still walk out. This is shooting fish in a barrel. Okay, serious stuff.

The dollar. It's not just any old currency, right? So it it its ups and downs affect the whole world in like partly because Commodities are often priced in dollars, so y you know, your cost of oil, for example, as a country depends a lot on whether the dollar is going up or down, in addition to whether oil is going up or down and You can be very, very, very clever as an investor and you can be right about US stocks, biggest, most important stock market in the world.

But if you get the dollar wrong, then you get ironed out. So S P five hundred, the the big uh benchmark US stocks index just hit seven thousand the other day. It's up about two percent just in January so far. But if you're based in Euros, it's up more or less zero percent. And if you're based in sterling, it's down half a percent because of the dollar. So I guess the moral of the story is even if you

think you don't need to think about currencies, I'm afraid you do. So what's going on here, Mr Armstrong? There is a trust issue. Between the United States and the rest of the world, I think is the basic problem. I mean the chart of the dollar is a thing to behold. And I it's of course it's a joke to talk about charts on the radio. Uh and I won't. But like basically the decline in the dollar we've seen in the last week

The only thing that compares to it in the last couple of years is the Liberation Day freak out back in April. Right. So it looks like we had a uh you know, s uh a similar kind of collapse in trust in the United States. And I I think that's easy to understand in the following sense. Just on the heels of Sort of threatening to invade a NATO country. Trump talking about how he doesn't care about the dollar and indeed he's fine with a weak dollar.

We had the United States government signal that it might intervene in the dollar yen market, and then we had the Treasury Secretary of the United States say that actually we had a strong dollar policy. So you can sympathize with people around the world who own a lot of US assets. from thinking things were a little jumpy over here and we better buy some protection against dollar volatility. Can add to that little list of like Greenland and all the rest of it, obviously the long running

Hellscape that is who's going to be the next chair of the Federal Reserve? You know, is the new central bank chief going to do exactly what Donald Trump wants? None of that helps. But so it's useful I think to do a few little scores on the doors here. So as you say there was a big hit to the dollar last year around Liberation Day, but that kind of petered out in the second half of the year. But what we've seen so far in twenty twenty six

So the dollar index is down by a little over two percent. So that measures the dollar against a whole bunch of other major currencies. Yes. That means you've got sterling, for example, is up two and a half percent so far this month, which is yet another poke in the eye for all those Muppets saying we were going to have to go to the IMF. Um It's the strongest for sterling since I think 2021. Euro is up uh also about two and a half percent.

The Swiss franc, which is one of the currencies that people like when bad stuff happens. That has gone absolutely banana. That's up about four percent strongest since about two thousand and eleven. This is bad. W l let's pour let's pour out a schnapps schnapps for the poor Swiss here. Just because they kind of mind their own business and they're a small country and they have a stable currency, they get these massive bids for their currency, which there isn't that much of.

No. Which kind of unbalances their economy. Yeah. And i it's a very uh difficult situation for them. Uh yeah, the Swiss are now in a situation where to deal with this currency strength, which is really bad'cause like you can't sell your stuff. When your currency is really expensive. And if you make watches and chocolate and cuckoo clocks to fall back on some tiresome cliches. That's a problem, right? Yeah. Puts Switzerland in a situation where it could end up

with disinflation where inflation is coming down, or even with deflation, where prices are coming down. This is a very bad thing. So the poor old Swiss are now in a situation where to try and deflect some of this demand for the Swiss franc they might have to either implement negative interest rates again, which they are not keen on, or they might have to intervene and buy dollars which would piss the Americans off.

And if they're not careful then the Americans could slap massive trade tariffs back on them. So the poor old Swiss National Bank is in a bind. Now you mentioned the Japanese yen a minute ago. That's a slightly different story. So listeners

Stick a little pin in this one. We we're gonna come back to that particular subject in a little bit. But as you say, the issue is it's it it's a trust issue. There's just so many reasons to think I'm a bit worried about what's gonna happen to the dollar in the year ahead and then that becomes quite self fulfilling because when investors take out hedges, they protect themselves against falls in the dollar.

kinda the way you do that is sell the dollar now and Yeah, sell it forward. Without going into the niceties. You sell it in the forward market and and th and for reasons that are too tiresome to rehearse here, that pushes the value of the dollar down. Yeah. And so yeah, you get this vicious cycle where weakness causes hedging, hedging causes weakness, weak more weakness causes more hedging and off you go.

Do you know what we have here? So there was a very nice note the other day, um on FT Alphaville Readers. It's free, you have to register, but it's free. And they said what we have here are termites. Slowly feasting away at the foundations of the dollar's dominance. Can I just make a clarification here, Katie? I think it's important to note that what is not happening as far as we can tell is global investors turning away from US assets. People still like treasuries, people still like stocks.

They just don't want the currency volatility associated with erratic economic policy making, and so they are paying to make that volatility go away. But also they you can still like your treasuries and you can still like your stocks, but just over time you can buy more of other stuff. So you don't have to sell your US assets. I know you're a hater. You're one of the haters. You're one of the American haters.

Well, well, well. I'm not I'm just not listening to your propaganda, Katie. I'm not. I'm not listening. Well, here's some other propaganda for you, Mr. Armstrong. Termites. So note on Alphaville from um Stephen Camin, who was uh previously head of international finance at the Federal Reserve, no slouch, and Mark Sobel, who was previously head of international finance at the US Treasury. Smart people.

They are saying that whereas a few years ago one would have been hard pressed to foresee a world without dollar dominance, now you can readily imagine such a disorder emerging in the coming decades. So bear the time frames in mind. But their list of termites here include The US is not being a nice friend to the rest of the world, right? It's not a trusted ally partner in the West. Bad friend. Bad bad.

The soundness of US macro policy has come into question. I think that's uh hard to argue with. No, it's come into statement. It's bad. Um you got budget deficits and massive debt burdens, which you know you can choose to worry about at some point. Institutions are being degraded, tick and the rule of law is being weakened. Tick. These are all reasons long term not to like the dollar.

Not to like the dollar. That that's that's really my point. That there's um there it's one thing to say Yeah, yeah. It's one thing to say that and I just think this is an important clarification. It's one thing to say there are kind of alternatives here and there as a currency to invoice in or a currency to borrow in or a currency, you know, whatever to transact in to the dollar. That doesn't change the hard fact.

that America is the indispensable economy and America's Treasury bond market is the indispensable safe asset uh market, and American stocks are the highest quality equity assets in the world. And so we just need you know, those two those two are separate things.

Uh they they are separate things, but at the end of the day it's kind of the same result because like I say, if you don't take action, if you don't hedge, if you as an investor that's outside the US, if you don't hedge, if you don't bulk up elsewhere, then if we carry on like this. Still a big if, the dollar could turn around. you're gonna end up at the end of the year

with on paper fantastic returns out of the US stock market, but basically getting nothing out of it'cause the dollar will just wipe you out. So it's a little bit more than a little bit of a fixed income. Especially in fixed income where the returns are naturally tend to be a little bit low.

Yeah, in bonds it's a problem. In stocks it's a problem. In in everything it it's a problem. Yes. Um you know, there's that sort of very famous old adage, and I know it's a cliche, but I'm gonna raise it. Anyway, the famous nineteen seventy one quote. From US Treasury Secretary John Connolly, who said The dollar is our currency, but it's your problem. I was born in nineteen seventy one, you know that?

It's a fine vintage. Mm-hmm. Good year. Um but uh yeah, so th this that's the thing. It fans problems out around around the rest of the world. Now w one of the things here that is

For me, one of the major reasons why the dollar is is in decline is around this stuff to do with the Federal Reserve, right? It's to do with the central bank. They're trying to find a replacement. The Trump administration's trying to find a replacement for Jay Powell'cause he steps aside in May. I know we've talked about this on the on the show multiple times before, but ultimately what they're trying to do is find someone who is a combination of

clever, knows what they're doing and has got the trust of the market. But simultaneously is willing to bend the knee to Donald Trump and kind of do whatever he wants and he really wants lower interest rates. Yeah. He's like very fixed. To the extent that he has trumped up Pun intended, uh a lawsuit to get rid of a Fed governor.

Uh and has He says it's nothing to do with him but yeah no. And he's subpoenaed yeah, he says it's nothing to do with him. Fair enough. It's his Justice Department. Mm. And he's subpoenaed uh the Federal Reserve and its chair Jay Powell. for uh criminal misconduct around the renovation the very expensive renovation of the Fed's headquarters. So this is bullying on a major scale. And the world don't like it. I think all the other stuff we've talked about.

is more kind of timely, but that is just burning in the background and it's the context for this whole discussion. It is smoldering. Here's my question for you, Rob Armstrong. We keep being told every five minutes that we are just around the corner from getting the nomination from Trump for who's gonna be the next Fed chair.

Where is the nomination, you guys? Uh Katie, I I'm I'm I'm gonna break a little news here. Negotiations between myself and the White House have been dragging on over terms. Yes. Uh but we're getting closer. So uh Yes, remember the bit where I said they had to know what they were doing? Uh yeah, no, it's it's taking time. I mean that White House has r rather a lot on its plate. Um we recently wrote about Rick Reeder, uh who is the head of

fixed income at Mighty BlackRock. Yeah. So that's bones to you and me. Yeah, he probably manages I think he manages the biggest private bond portfolio in the world, although I might be wrong about that. It's one of the really biggies. And he's very dovish. He's long been in favor of lower interest rates. He had a meeting with the president. The president praised him. So he's in the running and now according to the betting markets. He's not only in the running, he's in the lead.

So you've got you've got the Kevins. There's a few Kevins in the mix. Kevins are the kind of uh Kevin Walsh being the traditional choice, the kind of longest standing Fed official, right? Then you have Kevin Hassett, who is considered How do I put this elegantly, more closely aligned personally with the president? Nicely done. Who else uh is in the game? Have I have we missed any big ones? Every now and then people talk about the Treasury Secretary Scott Besson in relation to this job.

That's kind of like voodoo, right? To have your Treasury Secretary in the running for the Fed job. Although I guess Janet Yellen did do sort of one after the other, but Yeah, I don't think it's unheard of. And it's kind of a Dick Cheney thing where like he was the head of the committee to find a vice president and at the end of it he's like, Look who I found. It's me.

Ta-da The best person for the job is me. Yeah. So I think that g that that is one the market maybe m I I know you're you you kinda like the odds on him, don't you, Katie? I wouldn't rule it out. I just think this whole thing is now taking so long. Like we've been told repeatedly for at least the past two or three months that we're gonna know who the nomination is any day now. And the fact it's dragging on just makes me think, hmm

I think it would help possibly help the dollar actually if we get a little bit of clarity around this. And I think if it wasn't uh bascent or has it, I think that would help the dollar too. Yeah. Um I think if it was reader, it would help the dollar at first until the market found out the things he's been saying about interest rates for years. Yeah. I I'm but I'm I'm I'm crossing you off of my uh Okay I'm not on the list. Fair enough. Okay. It's not gonna be a little bit more.

Now, so that's all the kind of big picture dollar stuff, right? The dollar is weak pretty much across the board. I'll tell you where the dollar is not weak, and that is in Asia. So the dollar is very strong against the Japanese yen, for example, which is very, very weak.

Now some very weird stuff went down at the back end of last week in relation to the yen. And this is like this is the sort of, you know, nerdy currency market stuff that nourishes me'cause I used to be a big currencies market nerd. When the Bank of Japan on behalf of the Ministry of Finance in Japan gets upset with where the yen is, typically'cause it's too strong, but currently because the yen is really, really weak.

They go through a number of stages of trying to get them bend the market round to their direction. First of all, they tend to make lots of public statements around You know, look at the yen. That's a thing, isn't it? We don't like the volatility. And that's a kind of low key kind of lads, lads, lads, knock it off. And then if that doesn't work, what they tend to do is up the ante and they do something called a rate check.

Somewhere all the big kind of currency trading banks in in the yen get a little phone call from the Bank of Japan saying, Oh No reason. Just uh just wondering what your rate is on on Doll dollar yen. How much would it cost me if I wanted to manipulate the yen market? What would that run me? Yeah, what what would your price be if I wanted to sell a load of dollar yen or buy a load of dollar yen? No reason, just asking.

And that is kind of code for, oh okay, they're serious here, they're moving towards the point where they might directly intervene in the market and either buy or sell dollars to move the yen around. And I think when a Treasury Department or a central bank does that, they literally say to the dealers they're talking to, and don't forget to tell your friends that I called.

Right. So so rate checks are like a really important bit of this whole choreography. But here's the thing, the latest rate check that happened on Dolly N did not come from the Bank of Japan on the behalf of the Ministry of Finance. It came from the New York Fed on behalf of the US Treasury. Like, what the hell is going on there? Why are the US authorities involved in this way in like Low key yen management. This is very, very strange. Okay.

With with the the US does this about w once every fifteen years in you know does a check. in some rate markets. So this extremely rare event and unusual and is like Japan does this all by itself normally. There's no roles for Uh this is a very big deal. There are two theories going about why the US would do a rate check on the yen. The first theory is that uh the Trump administration, whatever else it says, likes a weak dollar and low rates, and it felt that it is dangerous.

that Japanese rates are rising and its currency is falling because that could infect the US market and ultimately drive US rates up and make uh Mortgages more expensive and make Republicans lose the midterms. That would be the order of events there. It would all be Japan's fault. It could all be Japan's fault. So theory number one is

Secretary Bissent and the President decided they didn't want a currency crisis on their hands in Japan because those things get out of hand and can corrupt the United States. The second theory is that Secretary Bassent and President Trump really want Japan to come through on their commitments to invest heavily in the United States. And this was a not very subtle reminder to the new Prime Minister of Japan that she has a very good and powerful friend in the United States.

And Can I give you a third theory? Okay, go. It is that a lot of Asian currencies are really quite weak at the moment and Trump doesn't like that, right? Because it makes Asian exports much cheaper, which he thinks is unfair to the United States. The dollar is too strong. Yes. One theory I've heard articulated recently is that this move on the Japanese yen

It could end up being a very early signal that something is cooking with regards to Asian currencies. Like you know, broadly speaking coming from the US Treasury that Okay, so you've got you've already got like a pretty strong pound, a pretty strong euro, a very, very strong Swiss franc and all of that. The the the fly in the ointment for the US dollar policy is that you've got very weak Asian currencies. Might they be trying to cook something up to

To to pull those currencies back up. Now, like my understanding is that what the US Treasury has done on the yen is just about the yen and that there's no read across to other aging currencies, but there's just a part of my brain that's saying, this is really weird, lads.

So listeners, we'd uh you know your guess as good as mine. Is there something cooking on Asian currencies? Who do you think is going to be the next Fed chair? It's not Rob, by the way. Unhedged at FT.com. Let us know what you think. We're gonna be back in just one sec with long short. Raddy ho, it is time for long shorts, that part of the show where we go long a thing we love or short a thing we hate. Rob, what you saying? Katie, you talking to you has convinced me. I think

Scott Besent is going to be the next chair of the Federal Reserve. Mm. You heard it here first, or you heard you heard it here second. You heard it from Katie first, you heard it from me second. But I'm putting I I'm putting my reputation behind it in a way that she did not. It's the first time I've ever convinced you of anything.

I am short of did you see the story we had this week that says that Elon Musk is thinking of timing the stock market listing of SpaceX his rockets company, to coincide with a rare planetary alignment and his birthday. Apparently he's targeting mid June because that's when Jupiter and Venus will appear very close together. I'm short this for two reasons. The first reason is that horoscopes are bullshit, and the second one is that

Can you imagine a woman CEO saying this out loud? She would get told to have a nice lie down and a cup of tea. Because it's Elon Musk? No no, very sensible. So I'm short these things. Listeners, we are gonna be back in your ears on Tuesday. So listen up then and in the meantime, thank you for your attention to this matter. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topha Fourheads.

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.