How low can the dollar go?

Katie Martin (0:06)

Pushkin. 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 OK. Today on the show, how low can the dollar go? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in rainy London. It is 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.

Ian Smith (1:16)

They've let me out. They'll talk to you, and then I'll be back on.

Katie Martin (1:21)

So you've been writing about this recently. I've been writing about this recently. The 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?

Ian Smith (1:43)

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 Warsh, 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. And 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.

Katie Martin (2:31)

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, so 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 $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. And yeah, as you alluded to, they do not like the dollar one little bit, right? What were they saying?

Ian Smith (3:25)

And this was conducted after the nomination of Warsh, 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, you know, 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 is starting to shrink. So 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 are those ongoing worries around US institutions. So there's this sense that when it comes to the US high debt and wide deficit, 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. If 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 makeup.