Dollar chaos, a new Fed chair, and a yen rescue mission?

(MENAFN- Seven Media) 04 February 2026: The year kicked off in dramatic style amid several high-profile geopolitical developments in Venezuela and Iran. However, it was President Trump’s stance on acquiring Greenland that sparked the most market turbulence, with his threat of fresh tariffs on a host of European countries reigniting the so-calle“ “Sell Ame”ica” trade - a rare unison whereby US equities, Treasuries and the dollar all fall in tandem. While his subsequent U-turn boosted the former, it failed to inspire a comeback in the dollar, which was instead left nursing heavy losses amid renewed fears over the erratic nature of White House decision making.

In the wake of the dollar selling frenzy, the US Dollar Index, which measures the greenback against a basket of its major counterparts, slumped to its lowest level in four years at one stage, a move that extended to almost 4% in a little over a week. Although we contest that his abrupt backtracking on the tariffs was the initial catalyst for the move, the sell-off was clearly compounded by several ancillary factors, namely the below:

.FX intervention speculation sends USD/JPY sharply lower. News‘of a ‘ra’e check’, whereby the US Federal Reserve contacted banks to obtain quotes for large volumes of dollar-yen trades, has fuelled conjecture of rare coordinated US-Japan intervention intended to prop up the yen.

.Trump he“alds ”he “great” US dollar decline. Whether’the president’s off the cuff remarks were anything more than spur of the moment ramblings remains to be seen, but there has emerged genuine lines of thought that this could mark the opening act of a more concerted White House policy effort to pursue a weaker dollar strategy.

.Markets fret over another US government shutdown. The federal government entered into a partial closure at the weekend, the second in the space of a little under four months.

dollar positioning exacerbated the move. Investors were heavily net short the dollar prior to the recent sell-off, providing market participants with little incentive to cover their shorts.

Since collapsing to its lowest levels since early-2022, the greenback has found much needed support amid some calming remarks from Treasury Secretary Bessent, a hawkish FOMC announcement and the appointment for Kevin Warsh as the next Fed chair. Incidentally, we see this rebound as a major factor behind last week’s sharp retracement in commodity prices, particularly gold and silver, which have acted as popular safe-haven alternatives to the greenback in recent weeks. Whether this recovery is set to continue this month will probably, we think, be at least partly contingent on the following.

Kevin Warsh: the lesser of three evils
President Trump ended months of feverish speculation last week by unveiling his pick to replace Jerome Powell as chair of the Federal Reserve: former governor Kevin Warsh. Of the three men that seemed to hold a realistic shot of winning the race (messers Hassett and Reider were the other names in the hat) we view Warsh as the least bad option for markets. While Warsh has recently aligned himself with Trump in calling for a lower Fed funds rate, he has historically been seen as a hawk, having advocated for a more gradual pace of cuts during the 2008 crisis, and has been a vocal advocate for preserving central bank autonomy.

Yet, we think that the mark’t’s apparent optimism over his appointment is not without risk. His hawkish reputation stems from his time as Fed governor, notably his opposition to balance sheet expansion, although this was all the way back in 2006-2011 - his recent remarks have been far more dovish. His plans to instigate a regime change at the Fed also adds an element of uncertainty to proceedings, whether that be a shift towa“ds “trend depe”dence”, as opposed to a focus on short-term data, a cut back on forward guidance (an end to the dot plot?) or a shrinking in the balance sheet. As we know, investors are not receptive to the unknown, and Kevin Warsh as FOMC chief offers precisely that.

Is the White House actually pursuing a weaker US dollar policy?
The jury remains out as to whether the White House is actually quietly orchestrating a weaker dollar strategy. Trump’s recent description of the latest sell-off a“ “g”eat” arguably underscores his emphasis on supporting manufacturing and lowering the trade deficit - policy goals that he is hoping to achieve with higher tariffs. Official communications from senior Republican officials suggest otherwise, however, notably remarks from Treasury Secretary Scott Bessent, who explicitly reaffirmed a commitment“to a “strong dolla” policy” in the aftermath of the’president’s remarks.

All things considered, we side with the vie’ that Trump’s recent comments on the dollar were spontaneous, off the cuff utterings that do not signal a coordinated policy pivot (even if they align with the president's long-held personal views). This is obviously consistent with’the president’s habit of speaking extemporaneously on economic topics, and the rapid intervention from Bessent the very next day to course correct points to a cleanup job in our view. This is’not the last we’ll hear of this topic, however, and any attempt of Trump to strong-arm a weaker dollar push into a prominent White House policy would undoubtedly present a serious downside risk to the greenback.

Japan snap election heightens yen intervention risks
Mere speculation that the US and Japan may be poised to engage in joint intervention to prop up the yen effectively did the job of actual intervention last month, but we are not convinced that the move will hold. For starters, the rarity of such coordinated action means that it is probably unlikely to materialise (the last time the US and Japan jointly intervened to prop up the yen was all the way back in 1998). Comments from Japanese Prime Minister Takaichi over the weekend, where she appeared to talk up the benefits of a weaker yen, are also at odds with such a stance.

The outco’e of this weekend’s election (08/02) will now be key for both the yen and, we suspect, the dollar. We think that a strong showing for Takaichi could push the yen back in the direction of the 160 level, as markets brace for greater fiscal spending and a higher debt risk premium. Any move higher in the USD/JPY exchange rate would mechanically boost the dollar against other currencies, and at this stage it will be interesting to see whether this is enough to trigger physical selling of FX reserves from Japan. At any rate, expect heightened volatility surrounding the vote on Sunday and a potentially decisive reaction once markets open for Asian trading on Monday morning.

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