The US dollar is poised for a recovery, particularly following the nomination of Kevin Warsh for the Fed Chair position, which may signal a shift in monetary policy direction. Per the full note from MUFG EMEA, Derek Halpenny highlights the potential implications of this nomination on dollar strength and ongoing debasement risks. The market is currently assessing how these developments will influence the dollar's trajectory, especially against major currencies like the yen, as Japan approaches a snap election. With no immediate high-impact events on the calendar, traders should remain vigilant to shifts in sentiment and positioning.
What the desk is arguing
MUFG believes that the recent announcement of Kevin Warsh's nomination as Fed Chair may bolster the US dollar's position, although challenges remain. The dollar's recovery hints at investor optimism regarding Warsh's potential influence on monetary policy, yet underlying risks of debasement and global economic pressures continue to threaten its strength.
Derek Halpenny points to external factors, including changes in Japan's political landscape, as critical elements that could further affect the US dollar. This broader perspective suggests that while there is potential for a dollar rally, it is precariously balanced against international developments and domestic economic indicators he views as less favorable.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, reflecting a cautious yet optimistic view on the currency's trajectory. This outlook slightly diverges from MUFG's commentary given the potential for increased volatility after Warsh's nomination due to approaching global events.
Several firms maintain a more bearish outlook on the dollar, indicating a divergence in sentiment. BofA suggests a target of 1.04, reflecting caution about the economic backdrop, while others like Deutsche Bank align closer to MUFG's perspective, anticipating a potential move higher in forex valuation.
01Kevin Warsh's nomination may support the US dollar's recovery, though risks remain.
02Debasement concerns are a significant factor in the dollar's outlook amid geopolitical uncertainties.
03Japanese political developments may further complicate the USD's trajectory.
Market implications
The dollar's recovery could lead to renewed interest from investors, but persistent risks highlight the need for caution. Traders should be mindful of external factors influencing market sentiment, particularly events in Japan.
Risks to this view
The main risks include potential changes in global economic conditions, political developments in Japan, and internal shifts in US monetary policy under Warsh's leadership.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpeny, Head of Research, Global Markets, EMEA and International Securities. It's Friday 30th January 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Julie Ellett, Head of Frabalux FX Sales. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hello everyone and welcome back to our Friday podcast.
I'm here with Derek. How are you? Hi Julie, I'm very good.
I'm very good. How are you? I'm good.
Thank you so much. So I wanted to start off with the US and talk about the next Fed share. If confirmed by the Senate, Kevin Walsh could replace Jerome Powell.
Derek, could you please tell us what is the signal about the broader debate over the Fed's direction and independence? Yeah, interesting developments today. So Kevin Walsh for most of the time when you look at the probability indicators was mostly a probability of less than 20%, but his probability had picked up of late.
And indeed, the dollar has rebounded on the back of this confirmation. So assuming the nomination goes through, yeah, like he has more credibility than Kevin Hassett or Rick Ryder. So I can understand the dollar rebound on the simple basis that he's not Kevin Hassett or Rick Ryder.
So he's ex-Fed, he's got more credibility. So the concerns about being influenced by Trump, which the perceptions of Hassett and Ryder were certainly that they would be more influenced, that's a positive outcome. I'm not convinced this is a sustainable dollar positive development.
Like the last time Kevin Walsh spoke was in July of last year, publicly spoke, and he was pretty clear and it's well known that he wants rate cuts. And that was what he was calling for. Now, of course, we've had a number of cuts since those public comments in July of last year, but it's assumed certainly that he wants further cuts from where we are now.
He is also a very strong advocate of ensuring Fed independence. And again, I can understand from that perspective, the dollar recovering. But if he, and in particular, he wants a smaller balance sheet.
So it looks like based on his views on rate cuts, based on his views on balance sheet shrinkage, that this is going to result in a potential steeper yield curve. And certainly the general movement of the dollar in terms of the curve is when you get a steeper curve, you get a weaker dollar. And I think the most important thing in terms of the dollar going forward is the ability to cut rates.
And the key difference maybe with Walsh versus, say, Kevin Hassett or Rick Ryder is that when Walsh goes into the FOMC, his ability, because of his credibility, to bring the FOMC with him to cut rates is a lot more plausible a scenario. Whereas with Kevin Hassett and Rick Ryder, they may not have been able to sway the FOMC into immediate rate cuts. So I would argue a Kevin Walsh FOMC probably will deliver rate cuts more quickly than would potentially otherwise be the case.
And then in terms of the balance sheet and the policies in relation to that, I think that would take time to shape and implement. It's probably not a 2026 story, although expectations of that happening could certainly influence the longer end of the curve. And as I said, a steeper yield curve, if that's what we do get, tends to coexist with a weakening of the dollar.
So, yes, it's good news from a credibility perspective. Yes, it's good news from protecting the independence of the Federal Reserve. But ultimately, we're still going to get rate cuts.
That's still his wish and his desire. And in that context, it's hard to envisage this being a kind of a sustainable dollar recovery scenario. Thank you, Derek.
You mentioned dollar immediate reaction following this news. But we are hearing renewed concern around long-term US dollar debasement, especially given fiscal dynamics and rising geopolitical tensions involving Iran. Also, you see, should markets take these fears and what indicators matter most?
Yeah, like I think like dollar debasement through most of this week was definitely a driver of dollar weakness. And, you know, we broke above 120 euro dollar, which certainly is, you know, we're bullish euro, as you know, we're bearish for the dollar for this year. But we certainly didn't expect a 120 level to be hit in January.
So I guess there was a number of different elements to that, which I think logically do elevate the risks of this theme of dollar debasement coming back again as we go forward. Obviously, Trump's comments in terms of the dollar performance being great in a year, sorry, in a week in which it was falling quite notably. Of course, last Friday, which maybe kicked off this fear of concerted attempts to weaken the dollar was the fact that the Federal Reserve checked rates in dollar yen when we were up at the highs around 159.
And that certainly is quite unusual. Now, the Fed didn't intervene. We now got confirmation today that the BOJ and the MOF didn't intervene either.
But we had a basically a six big figure drop in dollar yen, mainly because the Fed checked rates. And, you know, the perception that the US authorities would be willing to help out the Japanese authorities in weakening the dollar, I think, is kind of, again, feeding those concerns about dollar weakness. And of course, we all remember before the election in 2024, the focus on Steve Mirren and the content that he has written in research related to, you know, the rebalancing of global trade and the way in which you reduce the huge US trade deficit is through a weaker dollar, or certainly that's an integral part of it.
So it's hard to get away from the idea that the US authorities want a weaker dollar, despite Scott Besson's comments about a strong dollar policy, which to be honest, I think, are somewhat meaningless. So in that context, I definitely think this theme that was here this week, up until the Kevin Walsh story broke, I certainly think we can come back to that. And of course, the scale of performance in the likes of gold and silver before the correction we got today, is certainly indicating that dollar debasement fears is here.
And I don't think the Kevin Walsh announcement is necessarily going to shake the market out of that. So I think there's certainly risks of that going forward. And of course, part of that is just simply the unpredictability of Trump policy, be it on trade, the threat of trade tariffs for lots of different reasons, going into Venezuela at the beginning of the month, possibly an attack on Iran coming up.
It's all this level of uncertainty. And even though the dollar might bounce on a geopolitical risk event, let's say, for example, if there was an attack on Iran, it's unlikely to last much beyond the initial period. And I still think that the broader picture of dollar concerns and debasement risks and a desire of the Trump administration to weaken the dollar has more to run.
And it's one of the reasons why we think the dollar will have another year of depreciation. Thank you, Derek. You briefly touched base on the Yen and did I want to move to Japan?
Because Japan faces election uncertainty at the same time the BOG is navigating a fragile JGB's market. How could political outcomes influence the Yale curve policy? And what risk should global investors be watching in Japan's rates?
Yeah, I think the JGB market has calmed down a bit. We've retraced from the highs that we got after the announcement of a snap election. We've had a reasonably decent 40-year auction.
So some of the concerns have eased off. But I think going forward in terms of the Yen, in terms of JGBs, the election outcome is obviously pretty important. Like the approval ratings, you can understand why Prime Minister Takeuchi has called the snap election.
Her approval ratings are extremely high. So catch that benefit while you can, maybe, and go quickly. But it's not without its risks.
Like, we've had an upper house election and a lower house election over the last two years. And the LDP has done poorly. And the cost of living crisis has made the LDP far less popular than it used to be.
Now, the approval rating is very much rated to Takeuchi herself. And when you go to the polls, you could certainly question whether her specific approval ratings will translate into broader support, broader increased support for the LDP. The other dynamic is that New Kamado, which of course has been in coalition for many, many years, has basically switched sides and is now with the CDPJ, the opposition party.
And although New Kamado has a relatively small number of seats, I think it's 38, it's in the 30s, I think. It has a relatively small number of seats, it still has support across the country. And in many constituencies where there's a first past the post, those New Kamado supporters have supported the LDP.
But that won't be the case in this election. So there's certainly a risk that the LDP could underperform the implied results based on Takeuchi's approval rating. Certainly, if she does poorly, that's good for the JGB markets, because it reduces the risk of reflationary policies and fiscal expansion.
And I think the simple way of looking at this is the better that Takeuchi does, and the LDP does, the greater the potential negative reaction for JGBs and the potential for renewed yen selling. I think this is where the BOJ steps in. They may have to bring forward the timing of a potential rate hike.
And it is interesting, the Fed checking rates, what will the US get in return for that? And I think that's an interesting question, because of course, Scott Besant has complained about BOJ monetary policy as being the root cause of the yen weakness. So the fact that the Fed checked rates on behalf of basically helping out Japan, does that mean that some kind of deal has been done where maybe the BOJ is going to turn a bit more hawkish, and they could start to play a bigger role in trying to instigate some recovery in the yen?
So I think near term, as I said, the better the LDP does, probably markets initially will price in greater reflationary risks. And with that, we get some renewed dollar yen buying. But if we get any sort of surprise poor result for the LDP, then I think we can probably see some further yen gains from here.
But ultimately, the BOJ needs to step up and start to get the implied R star neutral policy rate. And they need to raise rates at least twice, if not three times, in order to get to that zone. And I think that's an important kind of condition for a more sustained recovery of the yen.
Interesting time. Thank you so much for your time, Derek, and your insights for today. Thank you very much, Julie.
And have a lovely weekend. Thank you. Thank you, everyone for listening.
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