Episode Details

Our Global Head of FX and EM Strategy James Lord and Global Chief Economist Seth Carpenter discuss what’s driving the U.S. policy for the dollar and the outlook for other global currencies.

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James Lord: Welcome to Thoughts on the Market. I’m James Lord, Global Head of FX and EM Strategy at Morgan Stanley. 

Seth Carpenter:  And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. 

James Lord: Today we're talking about U.S. 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 3pm 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 Warsh 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 U.S. 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 stronger strong dollar policy that Secretary Bessent referenced. 

So, what is your understanding? What do you think the strong dollar policy actually means? 

Seth Carpenter: 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 D.C. 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 U.S. 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. And so, if you think about those two things, at the same time – pushing really hard that the dollar should be strong, pushing really hard that currencies should be market determined – you start to very quickly run into a bit of an intellectual tension. And I think all of that is pretty intentional. 

What does it mean?  It means that there's no single clear definition of strong dollar policy. It's a little bit of the eye of the beholder. It's an acknowledgement that the dollar plays a clear key role in global markets, and it's good for the U.S. for that to happen. That's traditionally been what it means. But it has not meant a specific number relative to any other currency or any basket of currency. It has not meant a specific value based on some sort of long run theoretical fair value. It is always meant to be a very vague,  deliberately so, very vague concept. 

James Lord: So, in that version of what the strong dollar policy means,  presumably the sort of ambiguity still  leaves space for the Treasury to conduct some kind of intervention in dollar-yen, if they wanted to. And that would still be very much consistent with that definition of the strong dollar policy. 

I also, in the back of my head, always wonder w