In early London trading, the dollar posted its biggest gains against the Australian dollar, New Zealand dollar and Norwegian krone—currencies typically sensitive to commodity price swings. The rally came as gold extended its losses following Friday’s largest single-day drop in more than a decade, while silver plunged as much as 16% on Monday after suffering its steepest intraday decline on record.
Market strategists said the metals rout intensified pressure on commodity-linked currencies, amplifying the dollar’s rebound after a period of weakness. “Once precious metals did start to come under pressure, there were plenty of factors adding fuel to the fire,” Michael Brown, senior research strategist at Pepperstone Group in London, wrote in a research note. “The question everyone is now asking is what happens next?”
The dollar’s roughly 1% gain across Friday and Monday comes after the currency slumped in the second half of January. The rebound surprised some investors, as shorting the greenback had become one of the most popular macro trades last month. At the time, U.S. political tensions over Greenland and President Donald Trump’s perceived acceptance of the dollar’s slide had fueled speculation about a long-term decline in the world’s reserve currency.
However, the greenback’s weakness was sharply challenged after news broke that Kevin Warsh had been nominated to chair the Federal Reserve. The nomination triggered the dollar’s biggest one-day gain since May, as traders interpreted Warsh as a potentially more hawkish policy maker than other candidates previously discussed.
The reversal served as a reminder that the dollar’s path may not be steadily downward, even as some investors continue to bet on its longer-term decline. Asset managers had increased bearish dollar positions just days before the Warsh announcement, only to see those positions tested by the sudden shift in market expectations.
Still, many market observers remain cautious about the dollar’s outlook. Jeffrey Gundlach, CEO of DoubleLine Capital, said last week that the dollar had not behaved like a traditional safe-haven currency and pointed to the United States’ large deficits and unpredictable policy direction as ongoing headwinds.
“This is not a volatility event. It is currency devaluation,” Ahmad Saidali, founder and chairman of Redwood Heritage Group, wrote of the dollar’s decline since last January.
As February trading begins, major strategists continue to forecast further pressure on the dollar, though they expect any decline to be uneven. Goldman Sachs, Manulife Investment Management and Eurizon SLJ Capital all maintain views that the U.S. currency will weaken over time, but caution that market swings may remain sharp.
Goldman analysts highlighted that foreign exchange volatility has surged to levels similar to last April, even as equity and bond markets have remained relatively calmer. “The recent injection of policy uncertainty will be sufficiently durable to keep the dollar from making up lost ground,” the strategists wrote.
The recent market turbulence underscores the growing sensitivity of currencies and commodities to shifts in monetary policy expectations. With traders now watching both precious metals and the dollar closely, volatility is likely to remain elevated as investors reassess the outlook for the U.S. economy and global financial conditions.