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The dollar strengthened broadly against major pairs on Monday as a selloff in precious metals triggered a flight to safety and investors continue to weigh what a Federal Reserve under Kevin Warsh might look like.
The greenback firmed further after U.S. manufacturing data showed a return to growth in January, although tariffs, opens new tab raised raw material prices and strained supply chains.
“There is a slow-motion flight to safety underway across the currency markets, driven by last week’s implosion in the precious metals complex,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“We’re seeing a modest hawkish repricing in U.S. growth and policy expectations after manufacturing activity accelerated by far more than expected in January, suggesting that the economy continues to shrug off policy chaos. Risks to the dollar are tilting to the upside.”
Commodity-linked currencies were bearing the brunt of selling pressure in what appeared to be a nervous start to a week filled with central bank meetings and top-tier economic data, as well as an election in Japan.
The yen was back on traders’ radars, after Japanese Prime Minister Sanae Takaichi talked up the benefits of a weaker yen in a weekend campaign speech, in a tone at odds with her finance ministry that has worked to stem the yen’s declines.
Fed pick sparked dollar rally
The dollar rallied on Friday after U.S. President Donald Trump nominated Warsh as the next Fed chair. Analysts assume Warsh will be less likely to press for all-out rapid rate cuts than some other candidates who had been in the running, though he has sounded more dovish than current chair Jerome Powell.
Against a basket of currencies, the dollar rose 0.44% to 97.64.
Market pricing continues to indicate two Fed rate cuts this year with a move seen as unlikely until June, when Warsh would be chair if confirmed by the Senate.
“USD is finishing strongly and the momentum indicators give plenty of room for additional dollar gains,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
The euro retreated further from the $1.20 level, falling 0.53% to $1.1788, while sterling dropped 0.19% to $1.3661. Both the European Central Bank and the Bank of England are expected to keep policy rates on hold when they announce their latest decisions on Thursday.
Commodity currencies soft
Currencies from economies with greater exposure to commodity prices and risk sentiment remained soft on Monday.
The Australian dollar fell 0.22% to $0.6944, ahead of the Reserve Bank of Australia’s rate decision on Tuesday, even with expectations it will deliver a hike.
The kiwi dollar fell 0.35% to $0.5997, while the Canadian dollar weakened 0.5% to C$1.369.
Yen weakens
Against the Japanese yen the dollar rose 0.57% to 155.66 on Monday, with expectations that Takaichi’s party is likely to score a landslide victory in the upcoming lower house election.
A survey by the Asahi newspaper indicated that the Liberal Democratic Party is likely to well exceed a majority of 233 seats out of 465 seats in the lower house.
“Over the weekend Takaichi…seemed to talk the yen down, recognising some of the benefits of it, especially in light of the U.S. tariffs,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
Investors have sold the yen and Japanese government bonds in the run-up to the election on expectations of more expansionary fiscal policy should Takaichi win a strong mandate, and that the tax cuts her party has touted would further strain already stretched government finances.
Still, the ailing yen has found a floor recently as traders remain on alert to the prospect of a coordinated currency intervention by the U.S. and Japan after talks of rate checks from both sides late last month sent the currency surging.
