Episode summary
Could the U.S. Target a Weaker Dollar?
Thoughts on the Market (Morgan Stanley)
· · Hosts: Seth Carpenter · Guests: James Lord
Summary
James Lord and Seth Carpenter argue that recent dollar moves reflect more than ordinary rate differentials. Carpenter says the traditional “strong dollar policy” is deliberately vague and can coexist with intervention or a weaker dollar, because Treasury has long treated currency policy as its domain and emphasized market-determined exchange rates. He also says the current administration has added more nuance by questioning whether a very strong dollar can hurt trade flows.
Lord says Morgan Stanley started the year bearish on the dollar, driven first by conventional growth and Fed expectations and second by a rising risk premium tied to U.S. policy headlines. He says that premium has become large enough that euro-dollar would likely be closer to 1.10 without it. But he also says the latest focus on Kevin Walsh’s Fed nomination may limit further dollar weakness in the near term.
For developed currencies, Lord thinks this is not the time to press for a weaker dollar because the ECB and Bank of England are expected to cut rates. He is more constructive on emerging markets, where stronger currencies, lower imported inflation, and underownership could support further gains and potentially give local central banks more room to ease.
Key takeaways
- Carpenter says there is no crisp numerical definition of a “strong dollar policy,” only a deliberately vague framework that can include intervention.
- Lord says the dollar’s recent weakness has been driven more by risk premium than by rate differentials, especially after U.S. policy headlines.
- Lord estimates euro-dollar would be closer to 1.10 if only rate differentials mattered, implying a large policy-driven gap.
- Lord says the ECB and Bank of England cutting rates could limit the case for a weaker dollar against euro and sterling.
- Lord sees more upside in emerging market currencies because stronger FX can lower imported inflation and attract duration inflows.
Notable quotes
“the majority of the dollar move that we've seen the weakening in the dollar that we've seen has been driven by that second component what we kind of call risk premier”
“Euro dollar would probably be closer to 110 if we were just thinking about the impact of rate differentials”
“this probably isn't the time to be pushing a weaker dollar”
“there should be over time more space for them to ease if the domestic conditions warrant it”
How the episode opens
Welcome to Thoughts on the Market. I'm James Lord, global head of FX and EM strategy at Morgan Stanley. And I'm Seth Carpenter, Morgan Stanley's global chief economist and head of macro research.
Today, we're talking about US currency policy and whether recent news on intervention and nominations to the Fed change anything for the outlook of the dollar. It's Thursday, February 19th at 3 p.m. in London.
So, it's been an interesting few weeks in currency markets. plenty of dollar selling going on. But then we got news that Kevin Walsh is going to be nominated to chair of the board of governors and that sent the dollar back higher, reminding everybody that monetary policy and central bank policy still matter.
So in the aftermath of the dollar yen rate check, investors started to discuss whether or not the US might be starting to target a weaker currency. Not just be comfortable with a weaker currency, but actually explicitly target a weaker currency, which would presumably be a shift away from the strong dollar policy that Secretary Bessant referenced. So what is your understanding?
What do you think the strong dollar policy actually means? strong dollar policy. That's a phrase, that's a term, it's a concept that lots of secretaries of the treasury have used for a long time.
And I specifically point to the secretary of the treasury because at least in the recent couple of decades, there has been in standard Washington DC approach to things a strong dichotomy that currency policy is the policy of the Treasury Department, not of the central bank. And that's always been important. I remember when I was working at the Treasury Department, that was still part of the talking points that the secretary used.
However, you also hear secretaries of the Treasury say that exchange rates should be market determined that that's a key part of it and with the back and forth between the US and China, for example, there was a lot of discussion was the Chinese government adjusting or manipulating the value of their currency and there was a push that currencies should be market determined.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- weaker dollar
- us dollar policy
- global currencies
- fx strategy
- em outlook
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