We have revised our USD forecasts lower against most major and Asian currencies, reflecting rising policy uncertainty around Fed leadership and independence, growing de-dollarization dynamics, and increasing political uncertainty ahead of the November US midterm elections. The story of Asian currencies is also turning more constructive, with the JPY regaining stability after Japan’s snap election, and the CNY continues to appreciate under active policy guidance. The greenback is no longer enjoying the support it once received from interest rate differentials and US economic exceptionalism. Instead, institutional credibility and political risks are becoming dominant drivers of currency performance.

The US Senate confirmation hearing of Kevin Warsh, President Donald Trump’s nominee to replace Fed Chair Jerome Powell in May, is still up in the air. Republican Senator Thom Tillis maintains that he will not support the hearing until the Department of Justice resolves its investigation into Powell. Even if Warsh is confirmed, it does little to dispel concerns about the Fed’s independence. Trump’s suggestion that Warsh cut interest rates aggressively to catalyze an outsized 15% economic growth risks reframing the Fed’s dual mandate away from price stability. Hence, markets are unconvinced that the hawkish Fed Governor of the past would necessarily remain hawkish as Fed Chair. We see two Fed cuts in the second half of this year.

Against this background, it was no wonder that AUD became the best performer so far this year. The Reserve Bank of Australia was the first major central bank to hike rates this year, with the market pricing in another reduction later this year. Unlike the US, the debate in Australia centres on whether the RBA’s monetary policy or the Treasury’s fiscal decisions were responsible for the inflation rebound. That said, following its exceptional 6% appreciation against the USD this year, we are mindful that rapid rallies can invite equally swift pullbacks. In the case of AUD, this could come if JPY carry trades unwind.

The Trump administration will not want a USD credibility crisis that undermines his “America First” platform ahead of the November 3 US midterm elections. Although Trump rode a hardline immigration stance back to the White House, the aggressive enforcement tactics of the Immigration and Customs Enforcement (ICE) agency risk turning the political asset into an electoral liability. The same political logic can also apply to Trump’s tariffs under the International Emergency Economic Powers Act (IEEPA). Although Trump framed the tariffs as necessary for reshoring and investments, voters have yet to feel the benefits due to recent weak jobs data and increasing concern that AI could displace white-collar and entry-level jobs, weaken wage bargaining power, and accelerate corporate cost-cutting. If the Supreme Court rules against the IEEPA tariffs, existing tariffs would be rolled back or suspended, with the resulting tariff revenue shortfall renewing fiscal deficit and federal debt concerns. Doubts remain that Trump’s State of the Union Address on February 24 will sway the polls, suggesting Republicans will lose control of one chamber of Congress in the midterms.

De-dollarization will continue. Several Danish pension funds have sold or reduced their US Treasury holdings due to concerns over US fiscal deficits and debt sustainability, unilateral trade and tariff policies, and challenges to the Fed’s independence. President Trump’s brazen move to seize former Venezuelan President Nicolas Maduro and repeated threats to annex Greenland have alarmed many countries, prompting them to reduce their vulnerability to potential US coercion. Additionally, China and Europe are pushing for their currencies, CNY and EUR, to assume larger international roles. Although the USD will remain the most liquid and dominant global currency, its policy premium is eroding at the margin.

China did not stop guiding the CNY stronger after the first US-China tariff truce in April 2025. USD/CNY broke below 7.00 in January, following its decline below its daily fixing in December 2025. The spot rate has previously fluctuated in the upper half of its trading band since July 2023. With the truce extended to November 2026 and Presidents Trump and Xi set to meet four times this year, Washington and Beijing are managing their rivalry. While Trump is focused on the November midterm elections, President Xi is focused on the 15th Five-Year plan and his goal for the CNY to become a strong and credible global reserve currency widely used in international trade, investment, and foreign exchange markets. Expect China to internationalize the Digital CNY more and rapidly expand CIPS as an alternative to SWIFT. Financial regulators reportedly advised domestic banks to limit new purchases of US Treasuries or trim existing holdings if their exposure is high. Overall, CNY will focus less on export competitiveness and more on enhancing credibility for the opening and deepening of capital markets.

Asia’s top underperformer, the JPY, regained stability. USD/JPY fell from the top of its three-year range between 160 and 140 after Prime Minister Sanae Takaichi led the Liberal Democratic Party to a landslide victory at the February 8 snap elections. The Takaichi government did not abandon its fight against the JPY’s weakness after the election. Markets likely overstated JGB risks by fixating Prime Minister Sanae Takaichi’s stimulus on fiscal worries and underplaying its reflationary impulse. The Government Pension Investment Fund (GPIF) reported JPY16.2 trillion investment gain despite JPY1.53 trillion losses on JGB holdings. Finance Minister Satsuki Katayama reassured that tax cuts will not be funded by new bond issuances but rather by reviewing tax exemptions and reducing expenditures. Japan’s two largest banks are reportedly ready to increase JGB holdings. Lastly, markets are pricing in a Bank of Japan rate hike in April and a Fed cut in June.

As we enter the Lunar New Year, we wish you and your families good health, resilience, and good fortune. May the Year of the Horse bring clarity amid volatility and opportunities amid change.

FX Daily will break on February 17-18 and return on February 19.

Quote of the Day
"The ballot is stronger than the bullet.”
     Abraham Lincoln

February 16 in history
In 1861, Abraham Lincoln stopped his train at Westfield on his way to Washington to thank 11-year-old Grace Bedell in person for her advice to grow a beard to gain more votes.