Dollar stalls after bouncing on speculation Warsh to get nod for Fed's helm

The market reacted dramatically to media reports that Kevin Warsh will be nominated today to succeed Federal Reserve Chair Powell at the held of the US central bank. On one hand, Warsh is perceived to be a hawk, but on the other hand, there is little doubt that the Trump administration seeks lower interest rates. The initial reaction was to cover short dollar exposure and there were dramatic moves in the foreign exchange market. However, European turnover has seen the greenback surrender some of its gains. The reaction of US participants is awaited. Meanwhile, it appears an agreement has been struck that will avoid another federal government shutdown, for at least a couple of weeks. 

The eurozone reported slightly better Q4 GDP than expected (0.3% quarter-over-quarter) and some preliminary figures suggest January CPI in the region remained below 2%. Japan reports softer than expected Tokyo CPI, a sharp drop in retail sales and small decline in industrial output. The data seem to support the cautious Bank of Japan. 

Prices

G10

After the large move on Tuesday, the euro spent the second consecutive session inside that day’s range (~$1.1850-$1.2080). Yesterday, it did not trade above $1.20 or below $1.19. Heightened speculation about Warsh being nominated today to succeed Fed Chair Powell sent the euro to $1.1895. It steadied but has not been able to resurface much above $1.1940. Options for 6 bln euros at $1.19 expire tomorrow. A smaller, but still significant option for 2.2 bln euros expire at $1.1925. 

The dollar traded in its narrowest range in five sessions against the yen yesterday (~JPY152.70-JPY153.55). A shelf appears forged Tuesday and Wednesday ahead of JPY152.00. Soft Tokyo CPI, disappointing retail sales, and firm US yields lifted the greenback to about JPY154.40 today. The (38.2%) retracement of the dollar’s drop since last Friday’s high is near JPY154.80. BOJ data confirms no material intervention took place in January. 

Sterling fell through Wednesday’s low but new buying emerged on the dip below $1.3745. Sterling reached almost $1.3810 in the North American afternoon yesterday. Sterling was sold to $1.3725 amid the greenback’s rebound today. Initial downside risk may extend to $1.3690-$1.3700. Options for GBP522 mln at $1.3800 expire today. 

The greenback extended is recent losses against the Canadian dollar and traded below CAD1.35 for the first time since October 2024. Options for $1.8 bln at CAD1.35 expire today. However, on the broad recovery today, the greenback reached nearly CAD1.3555. Yesterday’s high was near CAD1.3580, which also corresponds to the (38.2%) retracement of the drop since Tuesday’s high (~CAD1.3740). 

The Australian dollar traded on both sides of Wednesday’s range and carved out a roughly $0.6970-$0.7095 range. After the low was recorded, the Aussie returned to the $0.7040 level in the North American afternoon. It did not get much higher today (~$0.7055) before being sold to about $0.6970. Initial resistance now is seen around $0.7010. 

EM

The Mexican peso moved broadly sideways yesterday with a weaker bias. For the third consecutive session, greenback found support ahead of MXN17.10. Yesterday’s squeeze took the dollar to MXN17.3455, holding slightly below Tuesday’s high. After the high was recorded, the dollar pulled back toward MXN17.20. The dollar remains firm today and briefly traded slightly above yesterday’s highs. A move above MXN17.38 could spur a push toward MXN17.50. 

The US dollar is near the best level of the week against the offshore yuan. It was recorded Tuesday near CNH6.9565. Today’s high is slightly above CNH6.9535. Still, the PBOC lowered the dollar’s reference rate to CNY6.9680, a new low since the Q2 2023. Note this is the tenth consecutive week that the dollar has fallen against the onshore yuan. During this run the yuan has appreciated by about 2.2%. 

The Indian rupee remains soft. The central bank’s intervention this week seemed light and unaggressive. The rupee fell to a record low yesterday and is consolidating near it today. The dollar reached almost INR92.0165 yesterday and today it has held slightly below INR92.0

Other markets

Equities are mixed. Most of the large bourses in the Asis Pacific fell and the MSCI index of the region snapped a six-day advance. Perhaps helped by slightly stronger than expected Q4 GDP figures, Europe’s Stoxx 600 is up about 0.35%. US index futures are pointing to a sharply lower opening. 

Benchmark 10-year yields are 1-2 bp firmer today. Note that S&P announces the conclusion of its review of Italy’s credit rating today. The 10-year US Treasury yield is about a little more than 2 bp to approach 4.26%. The 10-year JGB yield softened by less than a basis point but the yields at the long-end of the curve were slightly firmer. 

Gold was slammed from $5375 in late North American trading yesterday to almost $4943 earlier today. It has recovered to around $5120 in European turnover. Silver tumbled from above $115 yesterday to almost $95 today. It has recovered through $100 in Europe. 

After soaring 3.5% yesterday, March WTI is consolidating, quieter today. It is roughly $63.65-$65.85 range and is a little below $65 in late European morning turnover. 

Data

The December US PPI is expected to have softened slightly, with the headline rate slowing to 2.8% from 3.0% and the core rate ticking down to 2.9% from 3.0%. Little impact is likely. Attention next week turns back to the labor market with JOLTS and the January non-farm payroll report. The median projection in Bloomberg’ survey is for a70k increase, with the unemployment rate stable at 4.4%. 

The larger than expected November trade deficit may warn of downside risks to Canada’s November GDP print today. The median forecast in Bloomberg’s survey was for a 0.1% growth (-0.3% in October) before the trade figures. The Bank of Canada left rates on hold earlier this week and the market expects policy to be unchanged until late in the year at the earliest. 

Mexico’s economy is expected to have rebounded after a poor Q3. The economy is expected to grow by 0.6% in Q4 for a 1.3% year-over-year pace. In Q3, the economy contracted by 0.3% and the year-over-year rate was -0.1%. The central bank meets next week. After cutting its target rate by 300 bp in 2025, it is expected to stand pat until later in the year. 

The eurozone economy grew by 0.3% in Q4 to match growth in Q3. The unemployment rate slipped in December to 6.2% from 6.3%, matching the record low. Separately, German states reported January CPI, and the national EU harmonized reading, due shortly, may have slipped 0.2% but due to the base effect, the year-over-year rate looks unchanged at 2.0%. France reported a 0.6 drop in household consumption in December, the second consecutive monthly decline. Spain’s harmonized measure of consumer inflation fell 0.7% in January, pushing the year-over-year rate to 2.5% from 2.9%. 

The UK reported slower expansion of consumer credit but a small increase in mortgage lending in December. There was little market impact. The Bank of England meets next week and is widely expected to hold the base rate steady at 3.75%. 

Australia reported firm Q4 producer prices: 3.5% year-over-year, the same pace as in Q3. Private sector credit expanded by 0.8%, after four months of 0.6% increases. About three quarters of the economist survey by Bloomberg, three-quarters expect a hike next week. The futures market has about 2/3 chance of a hike discounted. 

Tokyo reported softer January CPI, while Japan reported weaker December retail sales and industrial production. The CPI fell to 1.5% from 2.0% and the core rate eased to 2.0% from 2.3%. It is the second consecutive decline in industrial output and the seventh last year, though the 0.1% decline was slightly less than expected. Retail sales fell by a dramatic 2.0%. The median projection was for a 0.5% decline. It is the first decline since August. The boycott of Chinese tourists may have play a role. Japan’s economy may have expanded by 1.2% year-over-year in Q4 and price pressures a moderating. While the US has called on Japan to raise rates, the US economy is expanding at more than 5% according to the Atlanta Fed’s tracker and the Trump administration continues to call on the Fed to ease policy aggressively. 

China reports its January PMI first thing tomorrow. It is expected to be little changed from December, when the composite was at 50.7.