Dollar Strength Supported by Fed Expectations and Risk Aversion
The dollar has strengthened since President Donald Trump nominated Kevin Warsh as the next Federal Reserve Chair last week. Markets widely expect Warsh to avoid pushing aggressively for rate cuts, easing fears about central bank independence and reinforcing the dollar’s appeal as a safe-haven currency.
The recent tech stock downturn has intensified concerns over AI-related spending and the potential disruption from rapidly advancing AI tools across industries. Many investors see the selloff as a broad repricing of risk.
Charu Chanana, chief investment strategist at Saxo, summed up the mood in markets: investors are pricing in multiple shocks at once—scrutiny of Big Tech capital expenditure, AI disruption beyond mere productivity gains, and a liquidity squeeze tied to silver and margin requirements. “This looks like a positioning flush where the same crowded exposures are being de-risked across assets,” she said.
This wave of risk aversion has bolstered the dollar, even as U.S. Treasury yields fell after economic data suggested the labor market may be weakening ahead of next week’s closely watched payrolls report for January.
Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, noted that large moves across asset classes indicate crowded positioning. “The short USD position is a consensus trade and consensus trades are getting unwound as sentiment shifts from risk on to risk off,” he said.
Dollar Index Near Two-Week High
The dollar index, which tracks the currency against six major peers, slipped 0.2% to 97.759, but remained near its highest level since January 23. The index is on track for a 0.6% weekly rise, the steepest since early January.
Some economists suggest that slowing hiring could prompt the Fed to reconsider its policy stance. ING economists noted that a significant payrolls downward revision could increase pressure to resume rate cuts later in the year, even as traders currently price in two cuts, with a June move becoming more likely.
Yen Gains as Japan Election Nears
The yen strengthened to 156.83 per dollar, ahead of Japan’s national election, where Prime Minister Sanae Takaichi is seen as a potential winner. The vote has heightened market anxiety due to concerns about Japan’s fiscal direction, with the yen and government bond markets already under pressure.
The yen is on track for a weekly decline of over 1%, its largest drop since October. “An outsized victory will reduce near-term constraints on Takaichi’s fiscal policy goals including reducing the consumption tax,” said Samara Hammoud, currency strategist at CBA. She added that uncertainty over how Tokyo would fund expansionary policies could further weaken Japanese bonds and the yen.
The currency has hovered near an 18-month low against the dollar, prompting repeated warnings from Japanese officials that intervention remains on the table to stabilize the market.
Other Currencies and Markets
- Euro: Firmed to $1.1799 after the European Central Bank kept rates unchanged and downplayed the impact of dollar moves on future decisions.
- Sterling: Recovered some losses to $1.3575, after falling nearly 1% the previous session. The Bank of England kept rates on hold, but a narrow 5-4 vote highlighted uncertainty over the outlook for future cuts.
- Bitcoin: The cryptocurrency recovered above $65,900, up more than 4% after earlier dropping to its lowest level since October 2024 at around $60,017. Still, it is set for a 14% weekly decline, its steepest fall since November 2022.