This is an audio transcript of the Unhedged podcast episode: ‘The strong US dollar gets stronger

Ethan Wu
The dollar is motoring higher. [MUSIC PLAYING] It is up something like 6 per cent in the past 50 days, dragging down all kinds of currencies from the sterling to the euro to the yen. Today on the show, we discuss why the dollar is so strong right now and why it matters for anyone who uses currency to pay for things. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu coming to you live from the London studio for once, joined in the flesh by FT markets editor Katie Martin.

Katie Martin
You exist in real life, in human form.

Ethan Wu
I wasn’t sure that you did exist, but now I’ve confirmed for myself. You know, I trust but verify (Katie laughs) is kind of my philosophy when it comes to that.

Katie Martin
He thought I was like an AI Katie Martin, like . . . (Laughter)

Ethan Wu
You died 10 years ago, and they trained you (Katie laughs) on all the columns you’ve ever written.

Katie Martin
(Laughter) I feel like this is a segue. Welcome to London, Ethan Wu.

Ethan Wu
(Laughter) And the connection between me being in London and this currency show that we are doing right now. So, Katie, I got off the plane at Heathrow, and the first thing I did at the airport is I went to that horrible little currency ATM that charges you ridiculous mark-up and a service fee.

Katie Martin
Mmm. Why though?

Ethan Wu
Because I’m stupid? (Both laugh) And I paid $1.30 per pound.

Katie Martin
Yeah.

Ethan Wu
And I got like £140.

Katie Martin
The exchange rate is 1.20. £1 will buy you $1.22.

Ethan Wu
Oh, God. And not only did I pay this exorbitant exchange rate, I also found out when I got here that you guys all use cards now, like an actual civilised country. I thought it was gonna be the type of thing where I’m paying in cash everywhere.

Katie Martin
Yeah, we don’t pay in, like, bits of stone (Ethan laughs) and like. (Laughter)

Ethan Wu
Well, I just, I finished this George Orwell book earlier this year and there’s a bunch of like currency gibberish in there I did not understand. What is a two-bob bit? What is a bob note? What is a half crown? I don’t know what any of this stuff is.

Katie Martin
OK, so some of this is the old money so it’s a bit silly.

Ethan Wu
Oh, OK.

Katie Martin
Like, yeah, like a quid is a pound. That’s the main thing that you need to know while you’re here. So if someone says to you, right, that’s five quid or that’s a fiver, that’s £5.

Ethan Wu
Fiver. Americans, you hear that. A quid is £1 and don’t do your FX trading at the airport. Anyway, we need to talk about why it matters, right, that the dollar is so strong. One way to understand it is from the perspective of a tourist, right? If you are coming into a country with a strong currency from the country you came from, you just buy more stuff.

Katie Martin
Yeah.

Ethan Wu
No, that’s I think, pretty intuitive. Most people get that.

Katie Martin
Presumably you’ve been like trawling around Harrods while you’ve been here, like, spending money like it’s going out of fashion.

Ethan Wu
Yeah, my purchasing power is way up, which I appreciate.

Katie Martin
Yeah.

Ethan Wu
The things are expensive in London, I will say, even compared to New York. But that’s not the only way that a strong currency matters. I mean, you know, one thing that matters a lot for Europe, right, is that Europe imports a lot of energy, especially from the US, Middle East, parts of Asia. And oil primarily is priced in dollars. So it has a big impact.

Katie Martin
Yeah. So you know what they say about the dollar, right? It’s our currency, your problem.

Ethan Wu
Yeah. (Laughter)

Katie Martin
So and that . . . 

Ethan Wu
Specifically my currency, your problem.

Katie Martin
(Laughter) Correct. And so all major economies, apart from kind of Japan and China, that’s a slightly different issue. But most major economies are really struggling with high inflation at the moment. And the last thing they need is for all of the oil and other commodities that they import that are denominated in dollars to be getting more expensive. And that’s what’s happening as a result of having dollar strength at the moment. So on the margins, it’s not helpful to inflation profiles in places like the UK and the eurozone. We’re not at extreme levels where policymakers are gonna start standing up at G7 meetings and saying we really need to do something about this. Also, there’s nothing you can do about it unless the Fed changes its mind and starts cutting rates. But on the margins, this is not helpful for inflation in a series of different major economies.

Ethan Wu
Yeah, and there’s also the context that the country in, at least sort of in the west with the most benign inflation profile is the US, which is now the country that via the currency is creating inflation problems elsewhere and disinflationary pressures at home through the stronger dollar. You know, it’s given the Europeans and the Brits an inflation problem at a time where, you know, it’s not like inflation is completely out of control. It seems to have come down a bit in the UK . . . 

Katie Martin
It has.

Ethan Wu
But it’s not like you guys could use the help right now of a weaker dollar, really.

Katie Martin
Yeah, it would be helpful. It just goes back to the big theme that’s running through markets at the moment is American exceptionalism.

Ethan Wu
Yeah.

Katie Martin
So there’s this idea that in most major economies interest rates have risen to the point where they’re at the peak or close to the peak and they’re gonna stay there for quite a while. And what the market is saying through things like bond yields and through the dollar is that we think this is going to be a more painful process for other countries than it is for the US. We think the US can withstand this, whereas we think big economies like the eurozone and the UK have got a serious growth problem coming down the line and they are more likely to blink when the, you know, when the recession hits than the Fed is.

Ethan Wu
So I think this discussion of American exceptionalism gets us from, you know, why it matters that the dollar is strong to maybe some of the drivers behind it. And, you know, the core currency concept that you’re getting to is this idea of the dollar smile. And this is the idea that, you know, there are like three broad scenarios with the dollar and everything else, and two of them push the dollar up. Those are the tips of the smile, the kind of edges of your mouth, and the middle part, the down part where the dollar is weaker, is sort of in the middle. So taking it one by one. The dollar is strong in the two scenarios where either the US is crushing everyone else in terms of growth, they’re doing way better than everyone else. They’re the number one economy, American exceptionalism, that’s one side of your smile.

The other side of your smile is everything is going to shit. Everything is getting crushed. A 2008 type of situation where there’s a proper crisis, then people want the dollar for safety reasons. So those are the two kind of ends of your smile. They both push the dollar up. American exceptionalism and everything getting crushed. The dip in your smile, the middle of the smile when the dollar’s weakest is when the US is just kind of unremarkable and things are all right.

Katie Martin
Yeah.

Ethan Wu
You know, it’s that mushy middle where there’s nothing particularly attractive for the dollar in terms of safety or attractive for the US in terms of growth prospects. And we’re definitely on the US exceptionalism, like you said, the US exceptionalism end of the smile right now.

Katie Martin
Yeah. So I was reading a report just before we started this recording from Bank of America, and they were saying that the strength of the dollar that we’ve seen recently exceeds the fundamentals. So if you kind of map what the dollar index does, dollar index kind of measures the dollar’s strength against a bunch of different currencies. If you measure what the dollar index has done against gaps in interest rates between different major economies, against stocks, energy prices, yada, yada, it’s still exceeding that. So the dollar is doing even better than you would expect from the gap in interest rates or expected interest rates that we got.

And what we’ve got now is that the dollar index has formed, drumroll, a golden cross. (Ethan laughs) Now I’m no fan of technical analysis, as you are probably aware. I think it’s like horoscopes for men (Ethan laughs) but, like, on markets where you think, OK, this chart has done this funny pattern, that means that the following things are gonna happen. But a golden cross is the opposite of a death cross and it’s one of my favourites. It means that the short-term ascent of the dollar has broken through the pace of the longer-term ascent to the dollar. So that kind of indicates that it’s breaking higher. This could start to become a problem. You know, already we have, you know, there are some signs of unease over yen weakness in Japan. You get some signs of unease over renminbi weakness in China. Eurozone and the UK haven’t said anything on this point yet. We’re not at any sort of extremes if you bear in mind this week last year the pound was in total freefall . . . 

Ethan Wu
Yes.

Katie Martin
 . . . after the incident that we don’t wish to talk about anymore. (Laughter)

Ethan Wu
Liz Truss’s great plan to transfer purchasing power from Brits to Americans. Thank you, Liz Truss.

Katie Martin
That worked super well. But you know, nonetheless, you know that the pace of gains has been pretty handy recently. And all of a sudden, particularly on UK, you’re getting this little chorus of notes from the sell side, right? Notes from the banks saying, we think it’s time to sell sterling harder . . . 

Ethan Wu
Yeah.

Katie Martin
. . . than we were before. So Goldman Sachs, HSBC, various others all saying we’ve got lower targets for sterling than what we have before. So this thing is not over.

Ethan Wu
Yeah. To sort of bolster Bank of America’s point, this is from a note that Capital Economics put out earlier this week. Their analysts make the argument that let’s remember that US inflation is really trending down and higher for longer may be more of a posture than a reality, that the Fed needs to commit to higher for longer because they can’t appear to be weak. But the second that inflation looks like it’s coming under control higher for longer is, you know, gonna go the way of the dodo bird. I don’t know how much stock I put in that. I’m a little, I think, sceptical of that, but it’s worth considering, right, that today, markets believe in higher for longer. Tomorrow, you know, who knows?

Katie Martin
Yeah.

Ethan Wu
That conviction has been flimsy in the last year or so. It’s been, you know, on and off.

Katie Martin
So the bet right now is that even if you do get a bit of economic weakness from the US early next year, the Fed will stick its fingers in its ears and say, la, la, la, can’t hear you. We are not cutting rates into this mini-crisis because we’ve got to fully defeat the inflation monster first. We have to see the whites of Jay Powell’s eyes at the time to see whether that holds.

[MUSIC PLAYING]

Ethan Wu
Do you think if you stare into Jay Powell’s eyes long enough, you’ll see like a golden cross?

Katie Martin
I’ve never tried it, Ethan. (Both laugh) Give it a go.

Ethan Wu
We should ask our Fed reporter. All right Katie, we’ll leave it there, and we’ll be back in a minute with Long/Short. Welcome back. This is Long/Short, that part of the show where we go long a thing we love and short a thing we hate. Katie, I’m feeling long London . . . 

Katie Martin
Nice.

Ethan Wu
. . . since I’ve been here. I mean, maybe I’m just very easily impressed. But, you know, (Katie laughs) this is the first time I’ve ever said something positive about the UK on the podcast. It’s a really beautiful, charming, world-class city. It’s, you know, people here are, like, so much friendlier than New York.

Katie Martin
Really? That’s funny.

Ethan Wu
Yeah. No, like, if you go to the grocery store in New York, you’re expected to scowl at the cashier. They’ll casually scowl back at you. That’s just, that’s the way it is.

Katie Martin
They’d get beaten up if you do that here.

Ethan Wu
(Laughter) If you smile at them, they beat you up. (Katie laughs) Here, you know, you go get a coffee or something and there’s that kind of British cheer that people meet you with.

Katie Martin
Plus, it’s dead cheap for you.

Ethan Wu
This is true. This is true. My coffee costs me like one quid, 70p, is that?

Katie Martin
Where? That’s a really good price.

Ethan Wu
Ah, it’s a coffee shop near actually, near here. Pence, is that right? 70p?

Katie Martin
Yes.

Ethan Wu
OK. (Both laugh)

Katie Martin
Like Mike Pence, but money.

Ethan Wu
(Laughter) One quid, 70p for small filter coffee. I’m feeling long London.

Katie Martin
OK. I’m gonna be really annoying and also be long something.

Ethan Wu
Ugh, again.

Katie Martin
OK. I’m sorry, but it is what it is. I am long Jamie Dimon, rates trader.

Ethan Wu
Ooohh.

Katie Martin
So the chief exec of JPMorgan, you know, he’s supposed to leave this whole, like, rate strategy thing to his rate strategists, but he is saying we think that the world should prepare for Fed rates of 7 per cent and it’s like . . . It’s never gonna get high, you know, never gonna get that high. Bear in mind, in January last year, 2022, Jamie Dimon was saying, I think we’re gonna get six or seven rate rises this year.

Ethan Wu
Yeah.

Katie Martin
How everyone laughed. Everyone thought he was completely wrong. Turns out, if anything, he was underestimating how many rate rises we were gonna get from the Fed last year. So if he’s saying, listen, I think it’s plausible that we get to 7 per cent on Fed rates, then I’m minded to take him seriously.

Ethan Wu
Yeah. And I guess the implicit short in that entire conversation is smaller stocks and smaller companies that have more floating rate debt, like how much the US economy can cope with 7 per cent interest rates. You know what I mean?

Katie Martin
Tune in next time to find out. This time next year we’ll know.

Ethan Wu
If Jamie Dimon is right there will be many, much fodder for the Unhedged podcast.

Katie Martin
Yeah.

[MUSIC PLAYING]

Ethan Wu
That’s the flip side of it.

Katie Martin
Yeah.

Ethan Wu
All right, Katie, it’s good to be here. It’s good to be doing it in this beautiful studio. And listeners, we’ll see you back on Thursday for another London-based episode of Unhedged. Catch you then. 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, Alastair Mackie and Jess Truglia. FT Premium subscribers can get the Unhedged newsletter for free. A 90-day free trial is available to everyone else. Just go to FT.com/unhedged offer. I’m Ethan Wu. Thanks for listening.

[MUSIC PLAYING]

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