CAPITALDIGEST MARKET REVIEW, 02/02/2026

DOLLAR WEAKENS ACROSS THE BOARD AS YEN CLIMBS ON INTERVENTION RISK

The dollar moved sharply higher against the euro and the ​Swiss franc on Wednesday as U.S. President Trump withdrew a threat to impose tariffs on a number of ‌nations, saying he had reached an agreement on a framework of a future deal on Greenland with NATO. Trump’s threats to levy tariffs on a number of nations for their stance on Greenland spooked markets and triggered a broad selloff in U.S. assets, but his comments in Davos on Wednesday that he had he ruled out military action in the northern island offered investors some relief. The euro was down ‌0.36% at $1.17, having risen more than 1% in the last two sessions. It hit $1.168 on Tuesday, its highest ​level since Dec 30. The safe-haven Swiss franc was down 0.77% to 0.7958 per dollar, after gaining about 1.5% between Monday and Tuesday. Trump vowed on Saturday to implement a wave of increasing tariffs from Feb 1 on European Union members Denmark, Sweden, France, Germany, ‍the Netherlands and Finland, along with Britain and Norway, until the U.S. is allowed to buy Greenland, a step major EU states decried as blackmail. Trump did not offer any details in a post to Truth Social on what the framework for a future deal with NATO ⁠would entail, but said as a result that he would not impose the tariffs. The comments sparked a stock market rally, with ‍the S&P 500 (.SPX), opens new tab index up over 1.5%. “We’re seeing a bit of a relief rally in markets,” said Matt Weller, global head of ‌market research ‌at StoneX. “I really do think the details perhaps are not as relevant, even perhaps if they never come to light. The near-term crisis appears to be behind us, and we’ll wait to see what crops up next to drive sentiment.” Still, European Union leaders are set to proceed with an emergency summit on Thursday to discuss options following Trump’s tariff threat, a council ⁠spokesperson said on Wednesday. The dollar was up against the Japanese currency, which faced its own selloff after Prime Minister Sanae Takaichi on Monday called snap elections for Feb 8 and pledged measures to loosen fiscal policy. The yen was last down against the dollar at 158.430. Investors closely watched Japanese government bonds (JGBs) which were hit hard early ‍this week, but rebounded on Wednesday. “The absence of strategic buyers in this segment has made price action more sensitive and amplified volatility. I expect this environment of elevated volatility to persist through 2026,” said Vincent Chung, co-portfolio manager at T. Rowe Price. “A further sell-off in JGBs would seem to ​drag the dollar/yen towards intervention territory at 159/160,” said Chris Turner, global ‍head of markets at ING. “However, if the yen sell-off is a self-inflicted wound from the Japanese government policy, the effectiveness of intervention will become increasingly ​questionable.”

STERLING INCHES HIGHER AGAINST THE DOLLAR; GAINING FOR FOURTH CONSECUTIVE DAY 

The pound edged higher against the U.S. dollar for the fourth consecutive day on Tuesday, underpinned partly by data that showed retail inflation picked up sharply in January, while UK political uncertainty simmered on. Sterling was last 0.12% higher against the dollar at $1.3696, hovering near a four-month high. Against the euro, the pound was last 0.12% lower to 86.72 pence to the euro. The dollar has been under pressure from an array of issues in recent weeks, including geopolitical and tariff uncertainty which reinvigorated the “sell America” trade last week, while traders have also been on alert regarding potential coordinated currency intervention by authorities in the United States ‌and Japan. The pound meanwhile has strengthened, buoyed by strong domestic data last week that indicated a pickup in the economy. Figures from the British Retail Consortium on Tuesday showed that prices at major British retailers rose at the fastest pace in almost two years in January. “Any suggestion that inflation has peaked is simply not borne out by these figures,” BRC Chief Executive Helen Dickinson said. The data could complicate decision-making for the Bank of England, which is broadly expected to keep interest rates unchanged when it meets next week. Markets show traders currently expect one rate cut by the middle of the year, with a strong chance of a second by December.  However, political tensions have been growing with the Labour Party blocking Manchester Mayor Andy Burnham from returning to parliament. Burnham is widely seen as a potential challenger to Prime Minister Keir Starmer, whose leadership of the Labour Party has been called into question.  The global moves have taken some heat away from domestic UK issues for sterling, said Nick Rees, head of macro research at Monex. “Sterling right now is benefiting from the distractions elsewhere in markets, but we think traders should be focused on the UK political situation, because that is really quite volatile,” he said.  “What looks like an emerging Labour civil war is not great for confidence, it’s not great for stability, it’s not great for political decision-making,” Rees said, noting that the fiscal backdrop in the UK is already difficult. “So, you add all that up, we see downside sterling risks as soon as markets start paying attention.”

DOLLAR UNDER PRESSURE AS INVESTORS REMAIN JITTERY OVER U.S. POLICY

The dollar eased against the yen and the euro on Thursday but remained above recent multi-year lows, with investors still jittery about U.S. policy even as a mildly hawkish Federal Reserve provided some support. The dollar has been under pressure for several reasons, including expectations of continued Federal Reserve rate cuts, tariff uncertainty and U.S. policy volatility. The currency ended last week with its biggest fall since last April driven partly by concerns about U.S. policy over Greenland. “Concerns that investors have about trade and geopolitical policies that have been wheeled out in the U.S. at the moment have been potentially negative for the dollar,” said Shaun Osborne, chief currency strategist at Scotiabank. Against the yen, dollar slipped 0.2% to 153.055 yen, while the euro rose 0.5% to $1.196. The dollar found some support after the Federal Reserve held interest rates steady on Wednesday against the backdrop of what U.S. central bank chief Jerome Powell described as a solid economy and diminished risks to both inflation and employment. Data on Thursday showed the number of Americans filing new applications for unemployment benefits fell slightly last week, still consistent with a relatively low level of layoffs, though lackluster hiring is stoking anxiety among households over the labor market. President Donald Trump said on Thursday that the U.S. should have substantially lower interest rates now and should have the lowest in the world. Some analysts did not expect cuts soon, however. “While the outlook remains uncertain, particularly given the appointment of a new Fed Chair in coming months, our baseline remains that the rate cutting cycle is complete, as labour improvement lies ahead,” said David Doyle, head of economics at Macquarie Group. “We see the next move as a hike, potentially occurring in the fourth quarter of 2026.” The dollar came under pressure earlier this week after Trump said on Tuesday the value of the dollar was “great”, when asked whether he thought it had declined too much. While Treasury Secretary Scott Bessent reaffirmed the U.S. preference for a strong currency, relieving some of the pressure, investors remain jumpy about further losses for the currency. “We’re getting kind of mixed messaging on the dollar from the White House and the Treasury … that doesn’t necessarily instil a lot of confidence,” Osborne said. While Thursday’s price action showed some signs of the dollar steadying after the sharp slide earlier this week, investors remain concerned about the near-term outlook. “Short-term momentum has turned sharply against the USD without adequate resistance from any of the long-term forces we had expected to support the currency,” Steven Englander, global head of G10 FX research and North American macro strategy at Standard Chartered Bank, said in a note.

US DOLLAR GAINS AS WARSH NAMED NEXT FED CHAIR

The U.S. dollar gained on Friday after former Federal Reserve Governor Kevin Warsh was selected to be the next ​Fed chair, and as the U.S. currency recovered from a sharp selloff earlier in the week that analysts say was ‌overdone in the short-term. President Donald Trump on Friday chose Warsh to head the U.S. central bank when Jerome Powell’s leadership term ends in May. Warsh is seen as likely to support lower interest rates but would stop well short of the more aggressive easing associated with some of the other potential nominees. Marc Chandler, chief market strategist at Bannockburn Global Forex, said that Friday’s move higher in the dollar is likely driven at least in part by positioning heading into the announcement. “The dollar was ‌terribly oversold on the short-term momentum,” Chandler said. Meanwhile Warsh is “only one person…there’s no consensus to have lower rates ​anytime soon, even if we get a late cut or two at the end of the year, like the December dot plot suggested.” Policymaker projections issued after the U.S. central bank’s December meeting showed a median expectation for a single quarter-percentage-point cut this year. The Fed on Wednesday held interest rates steady, as ‍was widely expected, amid what Chair Jerome Powell described as a solid economy and diminished risks to both inflation and employment, an outlook that could signal a lengthy wait before any further reductions in borrowing costs. Fed funds futures traders are pricing in 52 basis points of rate cuts this year, with the first 25-basis-point reduction likely in June. “The reaction in ⁠the markets to Donald Trump’s nomination of Kevin Warsh to be the next Fed Chair is broadly consistent with our view that the president ‍has made a relatively safe choice,” John Higgins, chief markets economist at Capital Economics said in a report. “The perception seems to be that Warsh is not someone who is ‌firmly in ‌the president’s pocket and that he won’t contribute to a further undermining of the Fed’s independence and fears of currency debasement,” Higgins said. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.79% to 96.93, with the euro down 0.79% at $1.1874. The dollar also added to gains after data on Friday showed that U.S. producer prices increased more than expected in December, with businesses appearing to pass on higher costs ⁠from import tariffs. Meanwhile, Trump on Thursday ⁠endorsed a spending deal negotiated by ​U.S. Senate Republicans and Democrats to avoid a government shutdown, although he acknowledged one could still occur, while lawmakers continued negotiating guardrails to rein in immigration agents. Geopolitical concerns remain in focus. Trump said on Thursday he planned to speak with Iran, even as the U.S. dispatched another warship to the Middle East and Pentagon chief Pete Hegseth said ‍the military would be ready to carry out whatever the president decided. The Japanese yen weakened 0.89% against the greenback to 154.49 per dollar. The greenback remains on track for a 0.8% weekly loss against the Japanese currency, however. The yen has undergone a sharp rally in the past week as Japanese policymakers hint at possible coordinated currency market intervention with the United ​States to defend the currency that had tumbled to near 18-month lows. The U.S. Treasury Department ‍refrained from calling on the Bank of Japan to continue raising interest rates in its latest exchange-rate report to Congress, removing a reference to do so in a previous report released six ​months ago. In cryptocurrencies, bitcoin fell 0.16% to $84,264 and earlier reached $81,104, the lowest since November 21.

DOLLAR STEADY AMID ROUT IN PRECIOUS METALS AS INVESTORS WEIGH A FED UNDER WARSH

The dollar clung ‌to its gains on Monday while collapsing prices of precious metals rattled financial markets, with investors weighing what a Federal Reserve under Kevin Warsh might look like. Moves in currencies were fairly insulated from a broader market rout triggered by a plunge in gold and silver which spilled over into equity markets, as ⁠investors were left selling positions in profitable trades to meet margin calls. The yen was also back on traders’ radars, after Japanese Prime Minister Sanae Takaichi over the weekend talked up the benefits of a weaker yen in a campaign speech, in a tone at odds with her finance ministry which has worked to stem the currency’s declines. The dollar held steady in Asia after a rally on Friday sparked by U.S. President Donald Trump’s ​pick of Warsh as the next Fed chair. Analysts assumed Warsh was less likely to press for all-out rapid rate cuts than some other candidates who had been in the running, though he has ‍sounded more dovish than current chair Jerome Powell. Against a basket of currencies, the dollar was last at 97.21, holding to Friday’s 1% gain. The euro was comfortably away from the $1.20 level as it last stood at $1.1848, while sterling fell 0.16% to $1.3664. Richard Clarida, PIMCO’s global economic adviser and a former Fed vice chair, said while Warsh will inherit a Federal Open Market Committee that remains divided over the pace and scale of further policy easing, he believes Warsh will be able to deliver two rate cuts this year, ⁠and potentially ‌even a third. “Beyond those next two or three rate cuts, ⁠we believe Warsh may be more wary, depending on the inflation outlook,” said Clarida. “Warsh, based on his writings since leaving the Fed, may be much less likely to rely on extensive forward guidance about the future path of interest rates.” Market pricing remains at ‍two Fed cuts for this year, with a move seen unlikely until June, when Warsh would be chair if confirmed by the Senate. YEN WEAKENS The Japanese yen was a touch weaker at 154.82 per dollar on Monday, pressured in part ​by the dollar’s strength and Takaichi’s weekend comments that seemed to condone a weaker currency and expectations her party is likely to score a landslide victory in the upcoming lower house election. A ⁠survey by the Asahi newspaper showed the Liberal Democratic Party (LDP) is likely to well exceed a majority of 233 seats out of 465 seats up for grabs in the lower house. Together with LDP’s coalition partner, the Japan Innovation Party or Ishin, the ruling alliance ⁠will likely reach 300 seats, the poll showed. Analysts at Societe Generale said that while the forecast sounds “excessively” favourable, such a win would mean “a lot” for Takaichi if achieved. “This will enable Takaichi to freely pursue her expansionary policy,” they said, adding that the initial market reaction would be to price in a greater risk premium on longer-dated Japanese government bonds and the yen. Investors have sold the yen and Japanese government bonds ⁠in the run-up to the election, on expectations of more expansionary fiscal policy should Takaichi win a strong mandate and that the tax cuts her party has touted would further strain already stretched government finances. Still, ⁠the ailing yen has found a floor in ‌recent times, as traders remain on alert to the prospect of a coordinated currency intervention by the U.S. and Japan after talks of rate checks from both sides late last month sent the currency surging. Elsewhere, the Australian dollar fell 0.67% to $0.6916, as it struggled from the broad risk-off mood in markets. The Reserve ⁠Bank of Australia sets rates on Tuesday, with expectations it will deliver a hike.