US President Donald Trump’s choice of Warsh as the ‘next Fed chairman’ sparked a sell-off in risk assets and sent precious metals tumbling on Friday, while the dollar recovered losses from earlier last week.While investors believe Warsh will be inclined to cut rates, they expect him to rein in the Fed’s balance sheet, which is generally supportive of the dollar as it reduces the money supply in the market.
The dollar continued to lead in early trading in Asia on Monday, leaving the euro firmly away from the $1.20 level, where it last stood at $1.1848.
Sterling fell 0.05% to $1.3680, while the dollar index was steady at 97.22 after rising 1% on Friday.
Richard Clarida, PIMCO’s global economic adviser and former Fed vice chairman, said that while Warsh will inherit a Federal Open Market Committee that remains divided over the pace and extent of further policy easing, he believes Warsh will be able to deliver two rate cuts this year, and possibly even a third. “Beyond the next two or three rate cuts, we think Warsh may be more cautious depending on the inflation outlook,” Clarida said.
“Warsh, based on his writings since leaving the Fed, is much less likely to rely on comprehensive guidance on the future path of interest rates.”
Elsewhere, the Australian dollar fell 0.54% to $0.69255, while the New Zealand dollar fell 0.3% to $0.6001.
The yen weakens
The Japanese yen fell 0.4% to 155.39 per dollar on Monday, partly pressured by the dollar’s strength and Takaichi’s weekend comments that appeared to condone a weaker currency.
A survey by the Asahi newspaper shows that her party is likely to win a landslide in the upcoming House of Commons elections.
“The February 8 snap elections will likely be the next major local catalyst for the yen,” said Tony Sycamore, market analyst at IG.
“An LDP majority would likely push USD/JPY towards 160, while a coalition outcome could leave the pair near the 155.00 level, depending on the coalition partners.”
Investors have sold off the yen and Japanese government bonds ahead of the election, on expectations of more expansionary fiscal policy if Takaichi wins a strong mandate, and because the tax cuts her party has touted would put further pressure on already strained public finances.
Still, the ailing yen has found a bottom recently as traders remain alert to the prospect of a coordinated currency intervention by the US and Japan after talks of interest rate controls from both sides sent the currency surging late last month.
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