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Forex

Dollar squeeze may struggle to unwind all of recent fall

ADMIN || 2nd February 2026

The squeeze higher for the dollar is wavering Monday after an initial burst set off fresh declines across metals, crude and equity futures. But the steep bounce for the greenback is likely to fade unless there are sustained shifts to undercut the fundamentals that helped drive the US currency down in the latter half of January.

President Trump’s decision to nominate Kevin Warsh as the next Fed Chair was the clear trigger for the greenback to come roaring back, but the thesis that proposed new central bank head is likely to be a relative hawk is likely to face a testing time. The White House has been extremely clear that it wants to see substantially lower interest rates, implicitly criticizing the current FOMC for pausing cuts amid concerns about sticky inflation. Investors may need to wait for Warsh’s confirmation hearings and beyond to get a better appreciation of his stance.

Uncertainty also lingers about the process of affirming his appointment, and the question of whether Jerome Powell will stay on as governor once his term as Chair ends. At the very least, we will still be looking at a US central bank that retains an easing bias while many major peers are moving either to neutral or toward tightening -- the RBA is seen as a 75% chance to hike on Tuesday, for example.

President Trump’s policy whiplash remains a feature that will push investors to be wary about overcommitting to US assets, whether that comes through a quiet quitting of the dollar or a sustained move toward alternatives assets that’s taken the place of the US exceptionalism theme of recent decades.

There’s also the straightforward setup that broad gauges of the dollar are still sitting just below the levels they reached in the Jan. 23 slump, meaning the currency needs to move substantially higher to repair sentiment toward the greenback. The dollar will garner some support from the yen’s likely slide into the coming Japanese elections, but the US currency will go on struggling more broadly as long as the White House pursues a volatile and disruptive approach to domestic monetary policy and international trade relations.

 

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