The dilapidated dollar

Katie Martin (0:06)

Pushkin. The dollar is having a pretty bad start to the year. The worst start to any year, in fact, since 1973, a sufficiently distant point in ancient geological history that even I was not around. Now, this was not the plan. All the big banks and investors were saying that 2025 was going to be a biggie for the buck. Just watch it fly higher based on that old chestnut, American exceptionalism. Now, if you listen regularly to this show, you'll know that has not quite worked out. A weak currency is not necessarily a bad thing. Winners and losers, swings and roundabouts and all that. But today on the show, we're going to unpick for you what is going on here and why do we care? And also, hey, we're the FT. We're also going to talk a little bit about the UK. We have a tearful Chancellor, that's Finance Minister, and a tax and spender gender that is politely in a bit of a mess. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets economist, the FT in tearful, worn out London. And I have a special guest today, Ian Smith, our senior markets reporter, the hardest working man at the FT, just about keeping pace with all this and managing not to cry, not in front of me anyway.

Ian Smith (1:30)

I'll keep my tears private.

Katie Martin (1:31)

Yeah, we'll talk more about crying later, listeners. But welcome back.

Ian Smith (1:36)

Thank you for having me.

Katie Martin (1:37)

Last time you were on this podcast, you were talking about lovely butterflies.

Ian Smith (1:40)

And you still have me back.

Katie Martin (1:42)

And we still have you back. You didn't go on our list of people who are never coming on ever again.

Ian Smith (1:47)

Okay, I was wondering.

Katie Martin (1:49)

So Ian, you wrote a big story the other day about this horrible start to the year for the dollar. How horrible is it?

Ian Smith (1:57)

Pretty horrible. It's been a stunning turnaround in the dollar this year. Coming into the year, people thought that Donald Trump's trade war would strengthen the dollar and maybe fuel inflation and thus strengthen the dollar. And instead what we've seen is a dramatic weakening in the dollar with the dollar index, which measures it against a basket of currencies, including the pound and the euro and the yen, falling 10%.

And you've seen this massive rally in the euro in particular up nearly 14% against the greenback.

Katie Martin (2:24)

I don't know whether listeners might think that sounds like a lot, but that is quite a lot for a really big currency like the dollar to fall 10% over the course of six months.

That's a pretty chunky move. And actually, like currencies markets have been sort of asleep for quite a long time, and now they've kind of woken up and they've decided they don't like the dollar. As you say, one of the reasons for that is that everyone thought, okay, you slap tariffs on things, then inflation goes up. And when inflation goes up, interest rates go higher and then that pulls the currency up with it. But that's not happened because instead, investors are saying, first of all, I can't really see this inflation that you guys are talking about. Second of all, this feels bad for growth, which will have the opposite effect on interest rates and therefore on the currency. So it's kind of interesting in and of itself, to me anyway, that we're really bad at understanding tariffs and what their macroeconomic impact is.

Ian Smith (3:19)

And we're seeing that play out before us. And I suppose that then feeds into interest rate expectations, which are crucial to where currencies go and how they strengthen and weaken. And at the beginning of the year, hardly any cuts were priced in, interest rate cuts were priced in by the US. Federal Reserve. But now over the next 12 months, even after good job numbers, this week, you've got four quarter point cuts that are priced in by around this time next year. So the market has moved to anticipate a weaker US economy than it had thought and greater interest rate cuts than it had thought. And all that helps to push the dollar down.

Katie Martin (3:52)

Yeah, yeah. Meanwhile, and I keep beating up that massive man, Rob Armstrong, about this. There is this big re appraisal going on in like heavyweight economic and investment circles about, do we still trust the dollar? Do we still think the dollar is going to go up in times of stress? Do we still think this is going to be a reserve currency, which is kind of shorthand for a currency that lots of central banks around the world want to hold for a rainy day in case there's some sort of emergency? All of a sudden, because of this kind of slightly chaotic Trump administration economic policy, people are saying, yeah, no, maybe we don't quite trust the dollar in the way that we previously did. So there's a parallel conversation going on here to say, you know, lots of conservative, say it very quietly, but quite boring investors are saying, maybe I need other currencies as well, or instead. That's a big factor as well here, right?