Dollar Bears Caught Off Guard as Warsh Fed Chair Rumors Spark Sharp Rebound
(Bloomberg) -- A massive wave of bearish bets against the U.S. dollar collided with resurgent bullish sentiment late last week, as markets reacted to the potential nomination of a policy hawk to helm the Federal Reserve.
Data from the Commodity Futures Trading Commission, compiled by Bloomberg, reveals that asset managers increased their net short positions on the dollar by a staggering $8.3 billion in the week ending January 27—the most aggressive bearish shift since April 2025. Hedge funds concurrently slashed their net long positions by $5.1 billion, the largest reduction since mid-2024, signaling a broad-based loss of confidence in the greenback.
That pessimism was abruptly challenged on Friday. The dollar index surged 0.9%, posting its strongest single-day gain since May, following reports that President Donald Trump had settled on Kevin Warsh to succeed Jerome Powell as Fed Chair in May. Warsh, a former Fed governor, is perceived by many analysts as more inclined toward tighter monetary policy, a view that provided immediate support for the currency. A concurrent tumble in precious metals, often seen as dollar alternatives, added further upward pressure.
"The timing was brutal for the shorts," said Michael Brown, senior research strategist at Pepperstone Group Ltd. "The market was pricing in continued policy ambiguity and potential White House pressure for a weaker currency. Warsh's name reintroduces the specter of hawkishness, forcing a rapid reassessment."
The episode underscores the fragile and politically-charged nature of the dollar's trajectory. Selling the dollar had become a consensus trade, fueled by Trump's public ambivalence toward dollar strength and mounting U.S. fiscal deficits. However, Friday's volatility served as a stark reminder that the path to a weaker dollar will be fraught with sharp reversals.
Despite the rebound, a chorus of prominent voices warns the dollar's structural headwinds remain firmly in place. Jeffrey Gundlach, CEO of DoubleLine Capital, recently noted the currency has lost its safe-haven luster, while analysts at Goldman Sachs, Manulife, and Eurizon SLJ Capital all project further depreciation ahead, albeit with heightened volatility.
"This isn't just noise; it's a fundamental revaluation," wrote Ahmad Saidali, founder of Redwood Heritage Group, regarding the dollar's prolonged downtrend. "The twin deficits and an unpredictable trade policy agenda are chronic weights."
As markets digest the news, early Asian trading on Monday saw the dollar give back some of its gains, highlighting the ongoing tug-of-war. Bloomberg's dollar spot index remains down approximately 1.3% for the year, following an 8.1% drop in 2025.
Market Voices: Reaction & Analysis
Eleanor Vance, Portfolio Manager at Sterling Capital: "This is a classic 'buy the rumor, sell the news' setup. The initial Warsh reaction is a knee-jerk based on his reputation. The real test will be his stated views on the balance sheet and inflation tolerance. The underlying macro picture still favors a softer dollar over the medium term."
Marcus Thorne, Chief Economist at Aspen Ridge Research: "The market is desperately seeking clarity on Fed leadership. A Warsh nomination, if confirmed, could signal a return to a more rules-based, inflation-focused framework. This provides a temporary floor for the dollar, but it doesn't automatically reverse the global reallocation away from U.S. assets."
David Chen, Independent Forex Trader: "It's amateur hour. The CFTC data shows the 'smart money' was completely wrong-footed—again. This whole episode exposes the farce of 'macro investing' based on political headlines. The dollar is a political football, and traders betting on fundamentals are getting slaughtered by Twitter announcements and backroom deals." [More emotional/pointed]
Rebecca Shaw, Head of FX Strategy at Nordhaven Bank: "Look beyond the daily gyrations. The volatility spike in FX now outstrips that of equities. This tells you that currency markets are the primary arena for repricing geopolitical and policy risk. Friday's move doesn't invalidate the bearish dollar thesis; it simply makes it a much bumpier ride."
--With assistance from Anya Andrianova and Carter Johnson.
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