The U.S. dollar recovered some ground on Friday, supported by rising market expectations that former Federal Reserve governor Kevin Warsh may be the next nominee to lead the central bank. Despite the intraday uptick, the currency was still positioned to record a second straight weekly decline as investors wrestled with policy uncertainty emanating from the U.S. administration.
At 05:15 ET (10:15 GMT), the U.S. Dollar Index - the gauge that measures the dollar against a basket of six major currencies - was up 0.4% at 96.505. Even with the rebound, the index was on track to finish the week down roughly 0.9%.
Nomination talk lifts dollar briefly
Late Thursday, U.S. President Donald Trump said he would make his nomination for Federal Reserve chair during this session, and market chatter has increasingly focused on Kevin Warsh as a potential pick. Warsh is viewed by some market participants as relatively market-friendly and, compared with other names discussed publicly, among the less radical choices.
Analysts at ING noted that Warsh has been seen as one of the more market-friendly candidates, pointing to his prior experience as a Fed governor and a history of hawkish commentary on balance sheet reduction. ING added that, given President Trump’s public push for lower rates this past year, it is reasonable to assume Warsh may have adopted a more dovish tone during discussions - and that selecting him could be intended to soothe concerns about a perceived erosion of Fed independence.
Still, the greenback’s broader weekly weakness reflects investor anxiety linked to what market participants describe as the volatile nature of the administration’s economic policy signals.
Policy moves and geopolitical strain add to uncertainty
Market unease has been compounded by a series of actions and signals from the White House. Late Thursday, the administration said the president signed an executive order to impose tariffs on nations that provide oil to Cuba, a measure that adds to recent geopolitical tensions involving Iran, Venezuela, Greenland and Europe.
Those developments come alongside reporting that the administration is considering military strikes against Iran as leverage to secure a nuclear deal, a possibility that has further elevated geopolitical risk premiums in markets.
On a more constructive note, the White House appeared to reach agreement with Senate Democrats on measures that would avert a partial government shutdown. ING commented that this apparent accord could at least reduce the immediate risk of another substantial leg lower in the dollar for the time being. Yet the brokerage also observed an ongoing appetite among traders to buy EUR/USD dips around the 1.188-1.190 area, despite signs that the dollar’s decline may be stretched when compared with underlying rates and macro fundamentals.
European growth data and mixed currency moves
In currency markets, EUR/USD traded 0.5% lower to 1.1909, giving back earlier gains even as official data indicated steady, modest growth across the eurozone’s biggest economies in the previous quarter. Spain led the bloc with quarterly expansion of 0.8%, ahead of expectations for 0.6%. Germany, the eurozone’s largest economy, grew by 0.3% on the quarter, also above forecasts.
France’s GDP increased 0.2%, matching predictions, while Italy expanded by 0.3%, slightly above projections. The Netherlands grew by 0.5% for the quarter. ING highlighted that EUR/USD continues to draw buyer interest in the 1.188-1.1900 range and suggested a decisive move lower for the pair would be primarily driven by dollar dynamics rather than euro-specific weakness.
GBP/USD slipped 0.5% to 1.3741, retreating from levels not seen since October 2021, as markets positioned ahead of the Bank of England’s policy meeting next week.
Asia: yen pressured by weak Tokyo inflation, yuan, Australian dollar moves
In Asia, USD/JPY rose 0.7% to 154.15 after data showed consumer inflation in Tokyo fell to its weakest pace in nearly four years in January. Because Tokyo’s inflation readings often serve as a bellwether for nationwide inflation, the drop pointed to a sustained easing of inflationary pressure and could complicate the Bank of Japan’s efforts to push through interest rate increases.
The yen has recovered significantly from 1-1/2 year lows during January, amid heightened market talk about possible currency-market intervention by Tokyo. That chatter intensified after Prime Minister Sanae Takaichi warned about excessive bearish bets against the yen. Still, USD/JPY was on course to decline almost 2% for the month of January.
Elsewhere in the region, USD/CNY inched higher to 6.9502. AUD/USD fell 0.7% to 0.6973 but remained close to a near two-year high. The Australian dollar’s strength has been supported by growing conviction that the Reserve Bank of Australia will raise interest rates at its meeting next week, following a sharp increase in consumer inflation in the fourth quarter.
Implications
The dollar’s intraday rebound tied to speculation over a Fed nominee illustrates how leadership uncertainty at the central bank can move markets in the short term. At the same time, the persistence of a weekly decline highlights the broader tug-of-war between domestic political developments and global macro flows. Traders are monitoring a range of moving parts - from administrative policy actions to regional inflation signals - each of which is shaping expectations for global rates and currency positioning.
Given the current backdrop, market participants are likely to remain attentive to additional signals from Washington, forthcoming central bank meetings and regional inflation data for further directional cues.