Associated Bank Thought Leadership Podcast

WGN: We’re on with Michael Sankowski, vice president of foreign exchange at Associated Bank. Michael, welcome back.

Mike Sankowski: Thanks, Steve,

WGN: I want to focus our conversation here on something that we've been talking to a lot of your colleagues about, and that is the tariff situation. We've gotten their view of how this is rolling out domestically, what the reaction is domestically. But I want to ask you about, from the foreign point of this, I’m sure the foreign desk, foreign exchange—how countries are dealing with not just the U.S. Supreme Court ruling voiding some of these tariffs, but also the president's threat for new tariffs. I know the EU has postponed a vote on a trade deal.

MS: Yeah, that's a great question, actually, because, you know, here in the United States, what we're hearing primarily is just about all the different things that are happening within the administration. But we don't hear as much about, you know, what's happening with the rest of the world.

And so what they're seeing from us is really a kind of chaotic situation where things change really from day to day, week to week, month to month. And here we thought they had, I think, everyone around the world, they thought, you know what? It had been chaotic in 2025, it's going to be more stable in 2026. And all of a sudden, Supreme Court comes in, throws a big wrench into that. And then the immediate reaction was to then pivot to a different kind of law to allow these tariffs.

I think overseas they're just tired, the back and forth. They just don't know what is what right now. And so we saw a little bit of this in in early 2025 where people were saying, well, we need to pull back on the United States. And then it got kind of mitigated over the last half a year. Now they're seeing this again with a whole other kind of chaotic situation.

And I think they're really, really leaning into this idea of, we need to do something that's going to be safe for us and allow us to have our own trade policy and do things in our way that's going to allow our industries to grow in that way. We just can't trust the United States anymore. So that's kind of the broader idea that we're seeing not just in Europe, but really kind of across the entire world.

WGN: Yeah, there are number of different countries that are in that same boat. The president, after the Supreme Court ruling, said that he was announcing new universal 10 to 15% tariffs for all of these countries. You talked about Europe there, how they want to do something more sustained, more solid. What does that look like? Are they just not going to trade with us or is there any enforcement action that they have against us? I mean, because some of these trade deals had already been signed.

MS: You know, they had all been signed, and they thought that they were they were just complete as they were. And so I think we're kind of back to square one almost, because this is a new across-the-board, 10% or 15% tariff—that's different than what was negotiated individually with these countries. And so when they had a trade agreement, or they thought they had one, and now they have to go back and renegotiate again. Can they just reset these levels? I think that they're just kind of tired of the back and forth and they want to see something that's more stable. And I think that the negotiation tactics are going to be a bit more wait-and-see rather than kind of proactive with the president.

WGN: How has this impacted our global trading situation? What's our relationship with our global trading partners after all of this?

MS: Sure. You know, it's interesting. We have a lot of kind of ill will that's been built up over the last year because of all the different things that's happened there with the new ruling, kind of more ill will with the difference in policy.

But if you look at the actual trade numbers, from 2025 versus 2024, they're about the same. You know, we imported about the same amount of goods and exported about the same. All this difference in the tariff policy hasn't really impacted the actual economics of it, the actual trade happening. So I think that a lot of, you know, going forward, these tariff levels are relatively low. When we started off at the 100% level back in April of last year, with these new levels at the 10 to 15% range, I think it's just kind of souring a lot of the talk between us. But in the end, you know, the economics do still make sense at this level.

You know, one thing I will mention, I think—I'm a foreign currency guy—we talk about tariffs being at 10%, 15%. You know, we've seen 10%, 15% movements in currencies kind of all the time. And so a 10% or 15% movement, it's not baked into all the pricing going forward over the next five years, but people expect exchange rates to move quite a lot. And so when we're looking at tariff policy, we're looking at trade policy, really a big component of that is, of course, going to be foreign exchange rates. And the U.S. wants a weaker foreign exchange rate. And I think everyone knows that now. It's very clear part of this policy that we're seeing now might be just to sow confusion, and confusion brings weakness to a currency. And so that might be part of the policy as well.

WGN: Talk to us a little bit about that, those exchange rates. What's the dollar been doing? How has it been performing against other countries? And we always talk to you and your colleagues on the foreign exchange desk about hedging your bets. What does that play look like?

MS: Sure. During the second half of 2025, we had really stable exchange rates with a number of different countries. But in early 2026, we started to see a bit more U.S. dollar weakness across the board. Mexican peso for sure. Euro broke to a new level above 120 where it had been kind of with the one 118.50 level as the high across last year, but so it's another 2% weaker. It's kind of falling back from there. It's gotten a little bit stronger back into the range.

But still a lot of these exchange rates are substantially weaker than they were kind of in the second half of 2025. And so what does a weaker U.S. dollar mean? It means when you're importing something, it's going to be more expensive. And so if you need to and you know, and frankly, the administration policy is they do want a weaker U.S. dollar. And so if we're looking at something that's a weaker U.S. dollar over the next three, six months a year, is it guaranteed it's going to be weaker? No. But is there a solid chance for it? Yeah, I think that you would be remiss to not at least consider and look at a possible hedge in that case, too, to just prevent yourself from paying 10% or 15% more for your normal goods.

WGN: And what would be the hedge?

MS: What you’d do is you'd lock in the current exchange rates where they're at right now, and a forward contract works, so there's a little bit of an interest rate component of it. So it's a little bit different than the actual exchange rate today. But over time, if you lock in the exchange rate that we see today, then, you know, with your cash flows, you can forecast them going forward. They're not going to be dependent upon what happens with the euro or Mexican peso or with our new or changing trade agreements.

WGN: Why would the administration want a weaker dollar? Put on your professor hat for us and give us a little lesson.

MS: Sure. I mean, that's a great question, because it all ties into the overall strategy here, is to bring manufacturing, bring companies back here to the United States, right? That’s kind of the broader idea here. A weaker U.S. dollar—what does it do overall? It makes it more expensive to import goods. It makes it more expensive to buy services overseas. And so if you're a U.S. company, you're thinking to yourself, oh, I can get this part, you know, from China, I can get this part from Europe or I can get it here domestically in the States.

Now, when that exchange rate, you know, when the U.S. dollar gets weaker, it costs you more money here to buy the same part over in Europe. And all of a sudden you start to think, well, maybe I can find a domestic supplier that’ll do that, or maybe I can build the factory here. And so the exchange rates, movements that we've talked about so far of 10% or 15%, those are kind of normal.

But I do want to stress, though, that within the last 15 years, we've been above 150 in the euro, so another almost 30% weaker against the euro. It's very possible that we could see rates like that again or maybe even with the Mexican peso and things like that, where those currencies continue to strengthen against the U.S. dollar and all of a sudden it does make more sense to build it here in the United States.

WGN: And so maybe what we all need to be doing is thinking more long term instead of short term.

MS: Possibly. And I know that's kind of hard. You know, it's fun because, you know, you work in the foreign currency markets and our businesses, you know, they're focused a lot of times on what's going to happen with this product over the next six months or the next year. And they forecast longer term.

But really what's happening, what they need to deal with what's happening, boots on the ground today. You know, when I import this product next month, I'm going to need to pay for it in 60 days. And then where is the exchange rate going to be?

So they're a lot more short-term oriented in terms of what they do for hedging, but their strategic thinking is certainly impacted by what happens longer term.

WGN: The dollar has lost some of not all of its safe haven value. Talk to us about the dollar and safe havens. Why is it that and why should we be concerned?

MS: That's another question that I think is part of the overall administration's strategy. They came up with the Mar-A-Lago Accords prior to the inauguration. This was kind of a bigger idea that was out there. And overall, that has a couple of components. One, to bring back manufacturing here domestically. And then part of that, two, is to really kind of focus on the Western Hemisphere as being kind of a base of operations and to let what's happening in Europe and maybe Asia happen in their own worlds and be less concerned with that.

And part of that is from for decades and decades, the currency around the world is the U.S. dollar. Right. It's the safe haven currency. Well, if you're going to pull back kind of internationally, what that means overall is that you want that safe haven, part of it, to kind of be smaller. You don't want to be as much of a safe haven around the world. And what we're seeing, with the kind of chaos and trade policy and the pullback internationally, is countries around the world thinking to themselves, okay, during a crisis, do we want to go to the USA? Do we want to go to the U.S. dollar? And I wouldn't say that's going away. It won't go away. We're too big, our economy is too strong. But is it going to be a little bit smaller? And are people thinking about, how can I diversify away from that? Of course there are.

WGN: I want to change topics briefly here, before we have to let you go, and that is the new Fed chair, the nominee of the new Fed. Talk to us a little bit about why we need to pay a little closer attention to this. I mean, there's an impact on your markets, the FX markets and rates, but there's something going on here that needs our attention. What is it?

MS: Certainly, you know, Kevin Warsh, he's been a long time, I would say Fed-adjacent person, at least since the 2008 financial crisis. He was part of the team there. And one of the things that he's always stressed is that he does not like having a big Fed balance sheet. And we use the Fed balance sheet over the last 15 years or so to kind of have a stealth weakening of rates or lowering of rates. We've used it to kind of bail out banks. We've used it for a variety of different reasons. But overall, the consensus is the bigger the Fed's balance sheet, kind of it's a stealth way to kind of bring liquidity to the market. A safety net. And he wants to—he's been a long time pounding the table—but he just he thinks it should be smaller, only used in times of crisis. And now, you know, I wouldn't consider us to be in a time of crisis. So, there's some chance that when he comes in, he's going to kind of aggressively move to shrink the Fed's balance sheet.

What we've seen with other parts of the administration is that it's not kind of status quo, where with the normal Fed chair coming in, you're just kind of, you know, keep the ship steady and go forward. I would think that there's some chance that he's not going to do that and not to kind of keep it steady going forward. He's going to aggressively move to shrink that balance sheet.

And if that happens, it's kind of like it might be considered to be like a tightening of rates. And so, if we're tightening rates when everyone wants the rates to go down, he might have to actually lower interest rates a bit more than the market's expecting. Now they're looking at two, maybe two and a half rate cuts over the next 12 months. If Kevin Warsh comes in, decides to cut this Fed balance sheet a bit more aggressively and a lot sooner than people expect, maybe we're talking about three or four or five or even more rate cuts in a lot shorter timeframe than people expect today.

I'm not guaranteeing that's going to happen, but I just think that there's some chance that this does happen and or this type of scenario can play out over the next six, 12 months.

WGN: Obviously, there would be some positives to that. I know a lot of people are hoping that rates go down for a bunch of different reasons. They have credit card debt, or they eventually want to have a lower mortgage rate. But couldn't that make the inflation problem worse?

MS: Right. Right. There's pluses and minuses here. It might, you know, really spur housing, which is a great thing. Housing tends to really drive the business cycle. So, any time you have you're selling more housing and doing more with refinancing, it definitely is a big plus to the business cycle. But like you said there, Steve, inflation, not that it's high right now—we’re at 3%--so, you know, it could go higher if they cut rates too much.

WGN: Yeah. Yeah. Something to watch out for. Michael, how can people get ahold of you and have a one-on-one if they want.

MS: Oh, sure. You can reach out to me at Associated Bank. My email is Michael.Sankowski@AssociatedBank.com. But you can also call Associated and they'll page you through to me. We also put out a FX newsletter that talks about global macro, things like this, specifically how they impact the foreign currency markets. So if you want to be part of that, we’re glad to send that over.