This is an audio transcript of the Unhedged podcast episode: ‘The incredible shrinking dollar’
Katie Martin
Pushkin. 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. Well, you know, kind of. 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 matters.
[MUSIC PLAYING]
This is on Unhedged, the markets and finance podcast from The Financial Times and Pushkin. I’m Katie Martin, a markets columnist at FT Towers in London. Has a tiny, tiny hint of spring in the air. And I’m joined through the magic of the internet by the big man Robert Armstrong of the Unhedged newsletter in New York City.
Robert Armstrong
There’s not a tiny, tiny hint of spring in the air in New York. There is a tiny, tiny hint of I’m about to freeze to death in New York City.
Katie Martin
So you’re still in your snow boots?
Robert Armstrong
I am indeed. And my long undies.
Katie Martin
Please. It’s a family show. Before we get going, we discussed briefly the Melania movie the other day.
Robert Armstrong
We did.
Katie Martin
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.
Robert Armstrong
This is shooting fish in a barrel. (Laughter)
Katie Martin
OK. Serious stuff. The dollar, it’s not just any old currency, right? So its ups and downs affect the whole world in, like, partly because commodities are often priced in dollars. So, 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 the 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 500, the big benchmark US stocks index, just hit 7,000 the other day. It’s up about 2 per cent just in January so far, but if you’re based in euros, it’s up more or less 0 per cent. And if you’re based in sterling, it’s down 0.5 a per cent 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?
Robert Armstrong
There is a trust issue between the United States and the rest of the world, I think, is the basic problem.
Katie Martin
Can’t imagine why that’s the case.
Robert Armstrong
We had a kind of a wild week. I mean, the chart of the dollar is a thing to behold, and it’s of course, it’s a joke to talk about charts on the radio 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” freakout back in April. So it looks like we had a, you know, a similar kind of collapse in trust in the United States. And I think that’s easy to understand in the following sense, just on the heels of sort of threatening to invade a Nato country. We had 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 sympathise 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.
Katie Martin
Can I 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 2026, so the dollar index is down by a little over 2 per cent. So that measures the dollar against a whole bunch of other major currencies.
That means you’ve got sterling, for example, is up 2.5 per cent 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. So the strongest force, sterling, since I think 2021. Euro is up also about 2.5 per cent.
The Swiss franc, which is one of the currencies that people like when bad stuff happens, that has gone absolutely bananas. That’s up about 4 per cent strongest since about 2011. This is bad.
Robert Armstrong
Let’s pour out a schnapps for the poor Swiss here. Just because they kind of mind their own business, and they’re a small country and they have this stable currency, they get these massive bids for their currency, which there isn’t that much of, which kind of unbalances their economy. And it’s a very difficult situation for them.
Katie Martin
Yeah, the Swiss are now in a situation where to deal with this currency strength, which is really bad because like . . .
Robert Armstrong
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 clichés, that’s a problem, right?
Katie Martin
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 will 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 are gonna come back to that particular subject in a little bit, but as you say, the issue is, 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. Kind of the way you do that is sell the dollar now . . .
Robert Armstrong
And sell it forward. Without going into the niceties. You sell it in the forward market and for reasons that are too tiresome to rehearse here, that pushes the value of the dollar down.
Katie Martin
Yeah.
Robert Armstrong
And so yeah, you get this vicious cycle where weakness causes hedging. Hedging causes weakness, more weakness causes more hedging. And off you go.
Katie Martin
Do you know what we have here? So it was a very nice note the other day 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.
Robert Armstrong
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 policymaking, and so they are paying to make that volatility go away.
Katie Martin
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.
Robert Armstrong
I know you’re a hater. You’re one of the haters, you’re one of the American haters.
Katie Martin
Well, well, well.
Robert Armstrong
I’m not, I’m just not listening to propaganda, Katie.
Katie Martin
Well, here’s some other propaganda for you, Mr Armstrong. Termites. Yes. So note on Alphaville from Steven Kamin, who was 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’ve been hard-pressed to foresee a world without dollar dominance, now you can readily imagine such a disorder emerging in the coming decades. So they’re the timeframes 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 airline, bad partner in the way.
Robert Armstrong
Bad friend.
Katie Martin
Bad friend, bad, bad. The soundness of US macro policy, it’s come into question. I think that’s hard to argue with.
Robert Armstrong
No, it’s come into statement. It’s back.
Katie Martin
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.
Robert Armstrong
Not to like the dollar. That’s really my point. That there’s, it’s one thing to say . . .
Katie Martin
I’m not arguing.
Robert Armstrong
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 into 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 market and American stocks are the highest quality equity assets in the world. And so we just need, you know, those two are separate things.
Katie Martin
They are separate things, but I’m saying, 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, it’s still a big if, the dollar could turn around, you are 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 because the dollar will just wipe you out. So it’s a really serious . . .
Robert Armstrong
Especially in fixed income, especially in fixed income, where the returns are naturally tend to be a little bit lower.
Katie Martin
Yeah. In bonds, it’s a problem. In stocks, it’s a problem. In everything, it’s a problem. You know, there’s that sort of very famous old adage, and I know it’s a cliché, but I’m gonna raise it anyway. The famous 1971 quote from US Treasury secretary John Connally, who said, the dollar is our currency, but it’s your problem.
Robert Armstrong
I was born in 1971, you know that.
Katie Martin
It’s a fine vintage.
Robert Armstrong
Good year.
Katie Martin
But yeah, so the, this, that’s the thing. It fans problems out around the rest of the world. Now, one of the things here that is, for me, one of the major reasons why the dollar is in decline is around this stuff to do with the Federal Reserve, right? Is 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 because he steps aside in May. I know we’ve talked about this 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. Like, he’s like very fixed on . . .
Robert Armstrong
To the extent that he has trumped up, pun intended, a lawsuit to get rid of a Fed governor and has subpoena.
Katie Martin
Subpoena, he says it has nothing to do with him, but yeah.
Robert Armstrong
No. And he’s subpoenaed. Yeah. He says it’s nothing to do with him. Fair enough. It’s his justice department. And he has subpoenaed the Federal Reserve and its chair Jay Powell for a 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.
Katie Martin
It is smouldering. 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?
Robert Armstrong
Well, Katie, I’m gonna break a little news here. Negotiations between myself and the White House have been dragging on over terms. But we’re getting closer.
Katie Martin
Remember the bit where I said they had to know what they were doing?
Robert Armstrong
(Laughter) Yeah, no, it’s taking time. I mean, that White House has rather a lot on its plate. We recently wrote about Rick Rieder. He’s the head of fixed income at mighty BlackRock.
Katie Martin
Yeah, So that’s bonds to you and me.
Robert Armstrong
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 favour 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.
Katie Martin
So you’ve got, you’ve got the Kevins, there’s a few Kevins in the mix.
Robert Armstrong
Yes. Kevins are the kind of, uh, Kevin Warsh being the traditional choice, the kind of longest-standing Fed official, right?
Katie Martin
Yeah.
Robert Armstrong
Then you have Kevin Hassett, who is considered, how do I put this elegantly, more closely aligned personally with the president.
Katie Martin
Nicely done.
Robert Armstrong
Who else is in the game? Have I, have we missed any big ones?
Katie Martin
Every now and then people talk about the Treasury secretary Scott Bessent 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 . . .
Robert Armstrong
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 is like, look who I found. It’s me. (Laughter)
Katie Martin
Ta-da! The best person for the job is me!
Robert Armstrong
Yeah. So I think that is one, the market. Maybe I, I know you kinda like the odds on him, don’t you, Katie?
Katie Martin
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, there’s a number of weird things going on here.
Robert Armstrong
Yeah, fair enough.
Katie Martin
I think it would help, possibly help the dollar actually, if we get a little bit of clarity around this.
Robert Armstrong
And I think if it wasn’t Bessent or Hassett, I think that would help the dollar too. I think if it was Rieder, it would help the dollar at first until the market found out the things he’s been saying about interest rates for years.
Katie Martin
Yeah. I’m, but I’m crossing you off of my . . .
Robert Armstrong
OK. I’m not on the list. Fair enough.
Katie Martin
OK. It’s not gonna be. Now, so that’s all the kind of big picture dollar stuff, right? The dollar is weak pretty much across the board. Tell you where the dollar is not weak. 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 because I used to be a big currencies market nerd. So when the Bank of Japan on behalf of the Ministry of Finance in Japan gets upset with where the yen is typically because 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? Yeah, 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 where somewhere all the big kind of currency trading banks in the yen get a little phone call from the Bank of Japan saying, oh, no reason. Just wondering what your rate is on dollar yen.
Robert Armstrong
How much would it cost me if I wanted to manipulate the yen market? What would that run?
Katie Martin
Yeah, 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, OK, 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.
Robert Armstrong
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. (Laughter)
Katie Martin
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 dollar yen 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.
Robert Armstrong
OK. One correction and two theories for you there. The correction is this was not low key. The US does this about once every 15 years in, you know, does a check in some rate market. So it’s extremely rare event and unusual. And is like hot news.
Katie Martin
Japan does this all by itself normally. Yeah. There’s no role for US.
Robert Armstrong
Yeah, So 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 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 mortgages more expensive and make Republicans lose the midterms. That would be the order of events.
Katie Martin
It would all be Japan’s fault.
Robert Armstrong
It could all be Japan’s fault. So theory number one is secretary Bessent 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 Bessent and President Trump really want Japan to come through on their commitments to invest heavily in the United States.
Robert Armstrong
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 that . . .
Katie Martin
Can I give you a third theory?
Robert Armstrong
OK, go.
Katie Martin
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. 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, OK, 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 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 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 Asian currencies. But there’s just a part of my brain that’s saying ‘this is really weird lads’.
So listeners, we’d 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@ft.com. Let us know what you think. We are gonna be back in just one sec with Long/Short.
[MUSIC PLAYING]
Ready ho it is time for Long/Short. That part of the show where we go long a thing we love or short a thing we hate. Rob whatcha saying?
Robert Armstrong
Katie, talking to you has convinced me, I think Scott Bessent is going to be the next chair of the Federal Reserve. You heard it here first, or you heard it here second. You heard it from Katie first. You heard it from me second, but I’m putting my reputation behind it in a way that she did not.
Katie Martin
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, but 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 Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alistair Mackie, Gretta 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/unhedgedoffer. I’m Katie Martin. Thanks for listening.
