Foreign Exchange Commentary

Summary

• Canadian dollar appreciates 1.9% this week before retreating marginally today.
• U.S. dollar down eight of the past ten trading days, before rebounding today on Warsh pick.
• U.S. dollar off over 10.7% from its record close on September 27, 2022. 
• Japanese yen appreciate dramatically this week trading above 159/dollar last Friday to nearly 152/dollar at mid-week before climbing back above 154 today.
• Japanese yen rally pushes some EM currencies to record highs; Malaysian ringgit touches highest level since 2018.
• U.S. Treasury yield remains elevated above 4.20% on the benchmark 10-year bond yield, currently at 4.25%.
• U.S. December producer prices rose 3.0% versus forecast of 2.8% year-over-year. 
• U.S. consumer confidence falls to lowest reading since 2014.
• Chicago Purchasing Managers’ Index jumps to 54.0 to highest level since 2024 versus 44.0 expectation. 
• Precious metals rally with gold topping $5,000/ounce, and silver above $100/ounce during the week.
• Korean won rises to strongest level since October.    

Noteworthy

• President Trump Picks Kevin Warsh as Federal Reserve Chair
• U.S. Dollar Falls Significantly During Week, Especially Versus Yen

President Trump said Friday he would nominate Kevin Warsh to be the next chairman of the Federal Reserve (Fed), choosing a former Fed official who has aligned himself with the president’s criticism of the central bank. 

“I have known Kevin for a long period of time, and have no doubt that he will go down as one of the GREAT Fed Chairmen, maybe the best. On top of everything else, he is ‘central casting,’ and he will never let you down,” Trump said in a post on his social-media account.

Warsh served on the Fed’s board of governors from 2006 to 2011, playing crucial behind-the-scenes roles in Washington’s rescue of Wall Street during the financial crisis. If confirmed by the Senate, he would succeed Jerome Powell, whose term as chair expires in mid-May.

Trump’s selection of Warsh would end a monthslong internal deliberation among the president and his top advisers over who should lead the central bank.

The Fed chair nomination was arguably the most important personnel decision Trump faced for the remainder of his term because the central bank serves as a first responder in financial crises and sets interest rates that affect every corner of the economy and markets.

Warsh will inherit a central bank divided over whether to cut interest rates further. Several Fed officials are uneasy about cutting when inflation remains above the central bank’s 2% target. Warsh gained a reputation for being an inflation “hawk” during and after leaving the Fed because he spent years warning that easy monetary policy would fuel rising prices. 

More recently, he has said the Fed should cut rates faster.

Warsh will also have to satisfy a president who has made clear he expects rates to fall—and who has shown no patience for Fed chairs who disappoint him. Trump showered praise on Powell after nominating him in 2017, only to lash out regularly when the Fed bucked his demands for lower rates.  

Trump has made clear he doesn’t want to make what he regards as the same mistake again. “Anybody that disagrees with me will never be the Fed Chairman!” he wrote on social media in December.

Warsh will have to be confirmed by the Senate, a process that has been complicated by a Justice Department probe of the central bank. Sen. Thom Tillis (R., N.C.), who sits on the Banking Committee that handles Fed nominations, wrote on social media Friday that Warsh is a “qualified nominee with a deep understanding of monetary policy.” But he said he would oppose the nomination until the investigation is resolved.

Beyond managing Trump’s expectations, Warsh will face challenges with few modern precedents: managing any trade-offs from tariff-related price increases after several years of above-target inflation; assessing how artificial intelligence is reshaping productivity and labor markets; and responding to the rise of digital currencies that could disrupt the banking industry, which is regulated by the Fed.

The Fed cut interest rates three times last year to guard against the risk of a sharper-than-expected slowdown in the labor market, but the central bank held rates steady this week in a range between 3.5% and 3.75%.

Trump has demanded rates go lower still and told The Wall Street Journal in December he thought rates should be at 1% or even lower.  He lashed out at Powell after the Fed’s decision Wednesday to hold rates steady. “He is hurting our Country, and its National Security,” Trump said on social media, referring to the chair as a “moron.”

Warsh left the Fed 15 years ago and has spent much of the time since cataloging how he thought the institution was going astray. His steady drumbeat of criticism of Powell—never a liability with Trump—kept his name in the conversation after the president’s return to the White House one year ago.

The transition could mark the most significant changing of the guard at the Fed since 1979, when Paul Volcker took over and dramatically reoriented the institution’s approach to inflation. Every chair since Alan Greenspan replaced Volcker in 1987 has emphasized continuity with his or her predecessor. Warsh has promised a clear rupture—a wholesale rethinking of the Fed’s asset holdings, policy framework, role in the economy and relationship with the executive branch.

Former colleagues say his rhetoric shouldn’t be mistaken for rigidity. “He’s not an ideologue,” said Randall Kroszner, who served on the Fed’s board with Warsh from 2006 to 2009. “Since I’ve known him, he was someone who tried to get things done. His approach is, ‘Let’s articulate goals as clearly as we can, and then find the best path to get as close to those goals as we can.’”

The stakes are high for Trump and extend beyond politics. The Fed sets short-term interest rates, but long-term rates—which determine mortgage costs, car loans and the government’s interest expense—are also shaped by investors’ expectations about inflation. An independent Fed has historically meant lower long-term borrowing costs because investors trust the central bank to keep inflation in check. A Fed seen as bending to political pressure could push those costs higher.

Warsh beat out finalists who included Kevin Hassett, the director of the White House National Economic Council; Christopher Waller, a sitting governor; and BlackRock executive Rick Rieder.

On Friday, Trump said Hassett would remain in his role as NEC director.

Trump wrote on social media that there “was great speculation that highly respected Kevin Hassett was going to be named Chairman of the Fed, and a great Chairman he would have been but, quite honestly, he is doing such an outstanding job working with me and my team at the White House, that I just didn’t want to let him go.”

The president confirmed that Waller and Rieder interviewed for the Fed chair position. “They all would have been outstanding and have a great and unlimited future with ‘TRUMP,’” he said. “Such amazing talent in our Country.”