Warsh Nomination Sparks Dollar Surge, Sends Precious Metals Tumbling
The U.S. dollar surged and precious metals cratered in a dramatic Friday session, as markets recalibrated following President Trump's nomination of Kevin Warsh for Federal Reserve Chair. The selection of Warsh, a former Fed Governor viewed as more inflation-averse than other candidates, sent a hawkish chill through markets anticipating aggressive rate cuts.
The dollar index (DXY) jumped 0.79%, its strongest gain in weeks. The rally was turbocharged by a one-two punch of policy and data: the Warsh nomination and a stronger-than-expected reading on U.S. producer prices. The January Chicago PMI also expanded at its fastest pace in over two years, further bolstering the case for a less accommodative Fed.
"Markets are reading this as a potential pivot," said Michael Vance, a senior strategist at Sterling Capital Markets. "Warsh's historical focus on inflation risks, coupled with sticky price data, suggests the Fed's path to significant easing may be longer and shallower than the market had priced in. This is a fundamental reassessment of the policy landscape."
The dollar found additional, albeit temporary, relief after President Trump announced a tentative deal to avert an immediate government shutdown, removing a near-term source of political uncertainty.
The shockwaves were felt most acutely in the commodities complex. February gold futures plummeted over 11%, while silver sank more than 31%, erasing a significant portion of their recent record-breaking rallies. The stronger dollar, which makes metals priced in it more expensive for overseas buyers, triggered a massive wave of long-position liquidation.
"This is a classic 'risk-on, dollar-up' flushout," commented Eleanor Chen, portfolio manager at Horizon Asset Management. "The safe-haven bid that propelled metals to records earlier this week evaporated almost instantly. The narrative shifted from dollar debasement and geopolitical fears to relative monetary policy tightening in the U.S."
The euro fell 0.92% against the greenback, despite a batch of solid Eurozone economic data, highlighting the dollar's dominant momentum. The yen fared worse, dropping 0.98% as domestic data weakened and U.S. Treasury yields rose, widening the interest rate differential.
Not all observers were convinced the shift is permanent. David Keller, an independent trader and frequent commentator on financial networks, offered a more cynical take: "This is a knee-jerk overreaction to a nomination that hasn't even been confirmed. Let's not forget, this administration's policy statements have a half-life of about 48 hours. The structural pressures on the dollar—massive deficits, political chaos—haven't gone anywhere. This feels like a short-squeeze in the dollar, not a new bull market. Gold will be back."
While Fed speakers presented a mixed picture on Friday, the market's immediate reaction centered on the perceived policy shift represented by Warsh. The probability of a March rate cut, as implied by swaps markets, dipped sharply following the news.
On the date of publication, the author did not have positions in any securities mentioned. This article is for informational purposes only and was originally published on Barchart.com.