Podcast Summary: Thoughts on the Market – "Could the U.S. Target a Weaker Dollar?"

Date: February 19, 2026
Host: James Lord (Global Head of FX & EM Strategy, Morgan Stanley)
Guest: Seth Carpenter (Global Chief Economist & Head of Macro Research, Morgan Stanley)

Episode Overview

This episode explores recent U.S. currency policy developments, centering around speculation about a possible shift from the traditional "strong dollar" policy. Prompted by market reactions to U.S. policy news—including the nomination of Kevin Walsh to Chair the Federal Reserve Board—James Lord and Seth Carpenter unpack what a "strong dollar policy" actually means, potential motivations for the U.S. to target a weaker dollar, and implications for major and emerging market currencies.

Key Discussion Points & Insights

1. What Does the “Strong Dollar” Policy Mean?

[00:10–03:31]

• The phrase "strong dollar policy" is intentionally vague and has long been a talking point for U.S. Treasury Secretaries.
• Seth Carpenter:
  • Emphasizes that "currency policy is the policy of the Treasury Department, not of the central bank."

    “There has been … a strong dichotomy that currency policy is the policy of the Treasury Department, not of the central bank.” (01:16)

  • The strong dollar notion is more about projecting the importance of the dollar in global markets—“the dollar plays a clear key role in global markets and it's good for the US for that to happen”—rather than specifying a certain value or exchange rate.
  • There’s an intellectual tension: The U.S. advocates both a strong dollar and market-determined exchange rates, resulting in deliberate policy ambiguity.

    “You start to very quickly run into a bit of an intellectual tension. … It is always meant to be a very vague, deliberately so, very vague concept.” (02:14–02:47)

2. Flexibility in Practice & Ambiguity as Policy

[02:50–05:31]

• Lord notes the “ambiguity” leaves the U.S. Treasury with room to intervene if needed, while still claiming consistency with a strong dollar policy.
• The dollar’s global reserve status gives the U.S. government foreign policy leverage—control over dollar flows translates to global influence.
• Seth Carpenter:
  • “All of that is part and parcel to it.” (03:31)
  • There’s no “crisp, specific numerical definition”—policy is intentionally left open for strategic purposes.
  • The current administration has added further nuance, expressing concern over the adverse effects of an excessively strong dollar on U.S. trade deficits.

    “We went from the previous broad, perhaps vague definition of strong dollar, and now we're in an even murkier regime where there could be other motivations for changing the value of the dollar.” (04:58)

3. Recent Dollar Weakness: Underlying Drivers

[05:31–07:53]

• James Lord:
  • Morgan Stanley came into the year with a “bearish view on the dollar” based on both conventional (growth, Fed policy) and unconventional (risk premia) drivers.
  • Risk premia are currently significant, tied to recent policy speculation (e.g., U.S. policy towards Greenland, talk of FX intervention).
  • Kevin Walsh’s Fed nomination has refocused markets on monetary policy fundamentals.

    “The majority of the dollar move … has been driven by that second component, what we kind of called risk premia.” (06:12)

  • Notes ECB and Bank of England are expected to cut rates, which may put downward pressure on euro and sterling, making now a poor time to push for a weaker dollar against G10 peers.
  • Sees opportunity for emerging market (EM) currencies, calling them “an asset class that has been underinvested in for some time.”

4. Implications for Emerging Market (EM) Currencies

[07:53–10:07]

• Seth Carpenter:

  • Asks whether EM central banks could benefit from a weaker dollar—through currency appreciation they may have flexibility to cut rates, helping with imported inflation and reducing pressure to “defend their currency” in volatile times.

    “If the dollar is coming down a little bit, especially against EM currencies, it allows more external stability for the central banks, allowing them to just focus on their domestic mandates…” (08:33)

• James Lord:

  • Notes most EM central banks are still “staying pretty conservative and more hawkish than … markets have generally been expecting,” supporting EM currencies.
  • If they did start to ease faster, currencies might briefly weaken, but in a benign market backdrop, renewed capital inflows (via bond buying) could offset this.

    “…what could ultimately happen is that asset managers will simply buy more bonds as they price in a lower path for central bank policy over time and that causes more capital inflows and that sort of overwhelms the knee jerk effect from the more dovish stance of monetary policy.” (09:24)

  • Concludes that bouts of volatility around EM easing could be buying opportunities in a low volatility environment.

Notable Quotes & Memorable Moments

• On Policy Ambiguity:

  “It means that there's no single clear definition of strong dollar policy. It's a little bit of the eye of [the] beholder.” – Seth Carpenter (02:03)

• On the Role of the Strong Dollar in Foreign Policy:

  “It allows them to project strength in foreign policy.” – James Lord (03:12)

• On the Evolving Nature of Currency Policy:

  “…now we're in an even murkier regime where there could be other motivations for changing the value of the dollar.” – Seth Carpenter (04:58)

• On Risk Premia Driving the Dollar:

  “The majority of the dollar move … has been driven by that second component, what we kind of called risk premia…” – James Lord (06:12)

• On EM Central Banks and FX Opportunity:

  “…there should be over time more space for them to ease if the domestic conditions warrant it. But so far we're not really seeing many EM central banks taking advantage of that opportunity.” – James Lord (08:48)

Key Timestamps

• 00:10: Episode topic introduction, recent market context
• 01:08: Defining “strong dollar policy”
• 03:31: Discussion of foreign policy and reserve currency dynamics
• 05:31: Dollar outlook and drivers: risk premia, rate differentials
• 07:53: Implications for emerging market central banks and currencies
• 10:07: Summary remarks and close

Tone & Style Notes

The conversation is analytical, measured, and pragmatic—reflective of seasoned market strategists. Both guests clarify complex policy topics, openly acknowledge ambiguities, and provide actionable reflections on current and potential market shifts. The discussion avoids alarmism and frames uncertainty as an inherent feature of currency policy, fostering a thoughtful, informed approach for listeners.

This summary captures the full scope of discussion, key arguments, and actionable insights for both policy watchers and market participants.