USD bounce could have 'more room to run'

The appointment of Kevin Warsh as the next chair of the Federal Reserve seems to have helped stop the rot for the dollar.

While Warsh has recently aligned himself with Trump in calling for a lower fed funds rate, the fact that he was previously seen as a hawk during his stint as a Fed governor in the late-noughties means that he is probably less likely to advocate for aggressive cuts than messrs Hassett and Reider.

His appointment may also act to calm fears over Fed independence, given that he has been a vocal advocate of preserving central bank autonomy in the past. Of course, any pick by the president will be regarded as a Trump loyalist to some extent, but we certainly view the Warsh appointment as the lesser of three evils.

It will be interesting to see whether the dollar continues to gain ground this week, as not only do we think that last week’s sell-off was excessive, but that downside risks to the currency have undoubtedly eased. The US government has partially shutdown, but the agreement on a spending package means that it is unlikely to last more than a few days.

It also appears increasingly as though Trump’s dollar remarks were more spontaneous and extemporaneous than a structured policy position. If that is indeed the case, then the recent dollar bounce could have more room to run.