Could the U.S. Target a Weaker Dollar?

Summary

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)

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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.

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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.

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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)

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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

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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.

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

Transcript

[A]

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

[B]

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

[A]

Today we're talking about US 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 Walsh 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 US 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 strong dollar policy that Secretary Besant referenced. So what is your understanding? What do you think the strong dollar policy actually means?

[B]

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 US and 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 holder. It's an acknowledgment that the dollar plays a clear key role in global markets and it's good for the US 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.

[A]

So in that version of what 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 whether the strong dollar policy has anything to do with the dollar's global role and the sort of foreign policy power that that gives the treasury in another areas where they can control dollar flows and so on, and that gives the US Government some leverage. It allows them to project strength in foreign policy. Is that anything to do with the traditional versions of the strong policy?

[B]

Absolutely. I think all of that is part and parcel to it. But it also helps to explain a little bit of why there's never going to be a very crisp, specific numerical definition of what a strong dollar policy is. So first and foremost, I think the discussion of intervention, I think it is in lots of ways consistent, especially if you have that more expansive definition of strong doll, the currency that's very important or most important in global financial markets and in global trade. So I think in that regard you could have both the intervention and a strong dollar at the same time. I will add, though, that the administration has not had a clear consistent view in this regard in the following very specific sense. When now Governor Mirren was chair of the Council of Economic Advisers, he penned a piece on the Council of Economics website that said that the reserve currency status, so the dollar had brought with it some adverse effects on the US in terms of what happened in terms of trade flows and that sort of things. Again, this administration has also tried to find ways to increase the nuance about what the currency policy is and putting forward the idea that too strong of a dollar in the FX sense, in the sense that you and your colleagues in FX markets would think about a high valuation of the dollar relative to other currencies could have contributed to these trade deficits that they're trying to push back against. So I would say 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. So, James, that's been our view in terms of the Fed. But let me come back to you, because there are lots of different forces going on at the same time. The central bank is clearly an important one, but it's only one factor among many. So if you think about where the dollar is likely to go over the next three months, over the next six months, maybe over the next year, what is it that you and your team are looking for? Where are the questions that you're getting from clients?

[A]

Yeah, so when we came into the start of this year, we did have a bearish view on the dollar. I would say that the drivers of it we split up into two components. The first component was a lot more of the conventional stuff about growth expectations, what we see the Fed doing. And then there was another component to it where what we define as risk premia, I suppose the more unconventional catalysts that can push the dollar around, as we saw, come very much to market attention during the second quarter of last year, when the Liberation Day tariffs were announced and the dollar weakened far in excess of what rate differentials would imply. And so I would say so far this year, the majority of the dollar move that we've seen, the weakening in the dollar that we've seen has been driven by that second component, what we kind of called risk premia, and the conversations that investors have been having about US policy towards Greenland, and then more recently, the conversations that people have been having around FX intervention following the dollar yen rate check. These sorts of things have been really driving the currency up until when the Kevin Walsh nomination was announced. When we look at the extent of the risk premia that we see in the dollar now, it is pretty close to the levels that we saw in the second quarter of last year, which is to say it's pretty big. Eurodollar would probably be closer to one if we were just thinking about the impact of rate differentials and none of this risk premium stuff over the past year had materialized. That's obviously a very big gap. And I think for now that gap probably isn't going to widen much further, particularly now that market attention is much more focused on the impact that Kevin Walsh will have on markets and the dollar. We also have the ECB and the bank of England. House call for those two central banks is for them to be cutting rates that could also put some downward pressure on those currencies relative to the dollar. So all of that is to say for some of the major currencies within the G10 space, like sterling, like Euro, against the dollar, this probably isn't the time to be pushing a weaker dollar. But I think there are some Other currencies which still have some opportunity in the short term but also over the longer run as well. And that's really in emerging markets. So all of that is to say I think there is a strong monetary policy anchor for emerging market currencies. This is an asset class that has been underinvested in for some time and we do think that there are more gains there in the short term and over the medium term as well.

[B]

So on that topic, James, would you then agree. So if I think about some of the EM central banks, think about Bonjico, think about the BCB where the dollar falling in value, their currency gaining in value, that could actually have a couple things go on to allow the central bank maybe to ease more than they would have otherwise won in terms of imported inflation. Their currency strengthening on a relative basis probably helps with a bit lower inflation. And secondly, a lot of EM central banks have to worry a bit about defending their currency, especially in a volatile geopolitical time. And you were pointing to lower volatility more broadly. So is this sort of a reinforcing trend perhaps where 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 which could also lead to a further reduction in their domest rates which might be good for investors.

[A]

Yeah, I think there's something to that. Given the strength of emerging market currencies, 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. There is a sort of general pattern with a lot of ems that they're staying pretty conservative and more hawkish than I think what markets have generally been expecting and that's been supporting their currencies. I think it's interesting to think about what would happen if they're on the flip side. What would happen if they did start to push monetary easing at a faster pace. I'm sure on the days where that happens the currencies would weaken a little bit. However, if the market backdrop is generally constructive on risk and investors want to have exposure to em, then 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. On the currency currency you get sort of more duration flows coming into the market and that helps their currency. So yes if EM central banks push back with more dovish policy significantly it could pose some short term volatility but assuming we remain in a low volume environment globally I would use those as buying opportunities.

[B]

Thanks James, it's been great being on the show with you. Thank you for inviting me and I hope to be able to come back and join you at some point in the future if you'll have me.

[A]

Thank you Seth for making the time to talk and to all you listening, thank you for lending us your ears.

[B]

You thank.

[A]

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[C]

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