US DOLLAR
The dollar pushed higher on Warsh’s nomination, with investors reassured by Trump’s pick, who is seen as likely to support lower interest rates but would stop well short of more aggressive easing.
The dollar had sunk to a four-year low earlier in the week. It came amid reports that the Federal Reserve Bank of New York had checked in with traders about the yen’s exchange rate, which pushed the Japanese currency to its strongest level against the greenback since November.
Analysts also told CNA that the yen was only part of the story behind the dollar’s recent weakness, with broader concerns about US policy direction and demand for US assets playing a role.
But the dollar recovered from a sharp selloff that analysts say was overdone in the short-term.
“The dollar was terribly oversold on the short-term momentum,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Kathleen Brooks, research director at XTB trading group, said the “interesting pick … may give the market some hope that Fed independence will be preserved.”
“Most currency strategists would argue that his nomination may be good news for the dollar, which can price out some risks of a more dovish pick,” said Forex.com’s Fawad Razaqzada.
“However, for as long as policy uncertainty hangs over the US economy with Trump’s tariff theatrics, the dollar debasement narrative is likely to hold back the greenback from making a meaningful comeback.”
US DEBT
Trump has repeatedly expressed his wish for an aggressive interest rate cut. His reasons for wanting this include bringing down costs on the sizeable federal debt.
In July 2025, he claimed that bringing down rates by three points would save “one trillion dollars a year”.
If the Fed were to give into Trump’s demands by lowering interest rates by more than necessary, “history suggests that the likely result would be unwelcome inflation”, economics journalist and analyst David Wessel said in a commentary for Brookings Institution, an American think tank.
“Lower rates tend to stimulate borrowing and faster economic growth, and when demand grows faster than supply, prices rise,” Mr Wessel wrote.
He cited examples from the latter part of the 20th century, when Argentina, Brazil, and Israel experienced high inflation due to their banks keeping interest rates low during periods of large budget deficits.
Speaking at an economic panel on Jan 4, former treasury secretary Janet Yellen said: “Should we be concerned about the potential for fiscal dominance? In my opinion, the answer is ‘yes’.”
Fiscal dominance occurs when government borrowing is so large that the central bank is pressured to keep interest rates low to reduce borrowing costs, even if economic conditions call for higher interest rates.
“Fiscal dominance is dangerous because it typically results in higher and more volatile inflation or politically driven business cycles,” Yellen said.
“Preconditions for fiscal dominance are clearly strengthening”, as the federal debt is on a steep upward trajectory, she added.
Wessel said that due to much of the federal government’s debt being short-term, inflation will not do much to lighten the burden of debt.
“When it matures, it will be replaced by debt at then-current interest rates, and those rates will be higher if there’s more inflation.”
As the US government is running big deficits, it also has to borrow more every year at current interest rates.