The U.S. dollar traded largely unchanged on Wednesday, as investors remained cautious after a brief partial government shutdown ended quickly. Meanwhile, the Japanese yen weakened toward a two-week low, with markets bracing for a potentially volatile national election later this weekend.
Currency markets continued to absorb the implications of Kevin Warsh’s nomination by Donald Trump to lead the Federal Reserve. The dollar found broad support on expectations that Warsh is unlikely to favor aggressive interest rate cuts. Investors also drew some reassurance from the appointment, seeing it as easing concerns over the Fed’s independence following Trump’s repeated criticism of the central bank and current Chair Jerome Powell.
The euro edged slightly higher to $1.1834, while sterling held steady at $1.3715 ahead of policy meetings at the European Central Bank and the Bank of England on Thursday. Both institutions are widely expected to leave interest rates unchanged.
The dollar index, which tracks the greenback against six major currencies, stood at 97.33, not far from a one-week high of 97.73 reached on Monday. The dollar’s rally following Warsh’s nomination initially weighed heavily on precious metals, although prices have since recovered part of those losses.
Despite recent firmness, the dollar index fell 1% in January after sliding 9.4% last year. The decline was driven by Federal Reserve rate cuts, narrowing interest rate differentials with other major economies, and growing concern over U.S. fiscal deficits and political uncertainty.
Strategists at UOB said currency volatility is likely to remain elevated ahead of Warsh’s confirmation process. They warned that upcoming congressional hearings could involve significant political drama, making the process far from straightforward. UOB added that Warsh will need to demonstrate independence and steady leadership to unite the Federal Open Market Committee amid a nervous market and a forceful president.
Late Tuesday, Trump signed a spending bill into law, ending a four-day partial government shutdown. However, key U.S. employment data scheduled for release on Friday will be delayed due to the disruption.
Japanese election weighs on the yen
The yen slipped 0.3% to 156.26 per dollar, its weakest level since January 23. The currency had previously rebounded sharply from 159.23 amid speculation of possible rate checks by the New York Federal Reserve.
Hopes of coordinated U.S.–Japan action to support the yen have helped pull it back from recent extremes, but uncertainty remains high ahead of the weekend’s election. Prime Minister Sanae Takaichi is seeking voter approval for higher government spending, tax cuts, and a revised security strategy that would accelerate defense expansion.
Carol Kong, currency strategist at Commonwealth Bank of Australia, said a strong result for the ruling LDP would give Takaichi greater scope to pursue fiscal stimulus. This could increase government debt levels, putting pressure on Japanese government bonds and the yen.
Earlier this week, Takaichi sparked a selloff in the yen after highlighting the benefits of a weaker currency during a campaign speech. Although she later softened those remarks, concerns persist that mixed messaging could undermine efforts to stabilize the already fragile yen.
Elsewhere, the Australian dollar stood at $0.7028 after surging 1% in the previous session, following an interest rate hike by the Reserve Bank of Australia. Markets are now pricing in the possibility of further rate increases this year. The New Zealand dollar edged slightly lower to $0.604.
China’s yuan briefly climbed to a near 33-month high against the dollar, supported by firmer central bank guidance. However, a weaker-than-expected daily fixing suggested authorities may be trying to limit the pace of appreciation. The yuan has continued to gain on the back of strong exports, and while policymakers are expected to resist excessive strength, analysts warn that upside risks remain and could test China’s fragile economic recovery.
