The US dollar strengthened again on Monday, with currencies sensitive to commodities leading the declines, as the impact of a sharp plunge in gold and silver prices continued to ripple through the market. During London morning trading, the dollar posted the most significant gains against the Australian dollar, the New Zealand dollar, and the Norwegian krone. Gold extended its decline after posting its largest single-day drop in over a decade last Friday, while silver fell by as much as 16% on Monday, following a record intraday decline on Friday. Michael Brown, a senior research strategist at Pepperstone Group in London, wrote in a research note, "Once precious metals begin to buckle, there are plenty of factors to fan the flames. Now everyone is asking, what happens next?"
At 9 a.m. London time, the Bloomberg Dollar Spot Index was up 0.1%, after rising as much as 0.3% earlier in the session. The dollar, the world's reserve currency, has begun a rebound since last Friday, following a sharp decline in late January. Given that shorting the dollar was one of the most popular macro trades last month, this rebound may have caught some investors off guard. Just before the weekend, threats from the US regarding Greenland, coupled with President Donald Trump's explicit acquiescence to a weaker dollar, only intensified debates about the currency's long-term depreciation. Option pricing indicates that while investor positioning has retreated from last week's extremes, the overall sentiment remains bearish on the dollar. On January 27th, the premium for options hedging against a dollar decline over the next month widened to a record high. Just days before news of Kevin Warsh's nomination for Fed Chair drove the dollar to its biggest daily gain since May, asset managers were increasing their short dollar positions. However, the dollar surged last Friday as investors viewed Warsh's stance as more hawkish compared to other potential candidates, reminding traders that the path lower for the dollar would not be smooth. European traders noted that month-end flows may have amplified the dollar's rebound, especially as technical indicators had already signaled a pullback. Bets in the money markets reinforce this view, with expectations for Federal Reserve rate cuts this year continuing to rise; the market is now pricing in about 55 basis points of cuts for the year, up from 42 basis points on Wednesday. A Morgan Stanley team led by Michael Gapen wrote in a report, "Warsh's nomination does not change our expectation—driven by disinflation—for the Fed to cut rates twice more in the second half of 2026. We expect any adjustments to the Fed's policy framework are more likely to be gradually implemented via balance sheet policy rather than by changing the interest rate reaction function."
Many market participants warn that the dollar could weaken further. Jeffrey Gundlach, CEO of DoubleLine Capital, said last week that the dollar has not functioned as a safe-haven currency for some time, and that the unpredictable policymaking of the Trump administration, along with high US deficits, continues to weigh on the currency. Ahmad Saidali, Founder and Chairman of the multi-family office and real estate advisory firm Redwood Heritage Group, wrote regarding the dollar's decline since last January, "This is not a volatility event; it is a currency devaluation." Real-time market strategist Garfield Reynolds stated, "Part of the motivation for this dollar rebound is the market's expectation that Warsh, as the next Fed Chair, will be more hawkish than some had feared." As February trading begins, many strategists maintain their view that the dollar faces further downward pressure. Goldman Sachs Group, Manulife Investment Management, and Eurizon SLJ Capital all anticipate further dollar weakness, although its descent is unlikely to be straightforward. In fact, despite concerns about a bubble in AI-related stocks, the volatility in foreign exchange and precious metals has recently exceeded that in equities. Strategists including Kamakshya Trivedi at Goldman Sachs wrote in a report, "It is noteworthy that the increase in FX volatility is now on par with last April's, while rate and equity volatility have not risen to the same extent. The recent injection of policy uncertainty has enough persistence to prevent the dollar from recouping its losses."
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